• BreadTalk Group (SGX:CTN) acquiring Food Junction for S$80m.
• Higher interest cost and lower Food Junction profitability to weigh on margins.
• Lowered FY20-21F earnings by 8-10%.
• Maintain HOLD with lower S$0.61 Target Price.

Maintain HOLD, With a Lower Target Price of S$0.61

• We remain neutral on BreadTalk Group (SGX:CTN) after it announced its acquisition of Food Junction for S$80m. Factoring in the effects of the acquisition, we anticipate a drag on margins and earnings due to:
  1. lower profitability of Food Junction vis-à-vis its own Food Atrium division; and
  2. additional interest costs for financing the acquisition with additional debt of S$50m.
• Nonetheless, on a positive note, the acquisition will provide BreadTalk with a higher market share in the foodcourt segment in Singapore, as well as a larger earnings base.

Where We Differ

• Our earnings forecasts are below consensus as we factor in a longer breakeven period for the new 4orth division. The division is in its infancy with scope to increase store count, but this will lengthen the division’s EBIT breakeven period. This unit should be capable of delivering similar margins to the restaurant division in the long term.
• We anticipate margins to head lower following the recent Food Junction acquisition as well.

Potential Catalyst

• We see potential for a special dividend of up to 4.5Scts if Perennial Real Estate Holdings (SGX:40S) sells AXA Tower.

Food Junction to Weigh on Earnings

• We maintain HOLD and lower our Target Price to S$0.61 post acquisition of Food Junction. This is largely due to a drag on earnings as a result of interest cost from financing the acquisition. BreadTalk will borrow additional debt of S$50m which will raise interest expense going forward.
• In addition, Food Junction currently has lower operating margins which we assume will lead to lower operating margins for Food Atrium in FY20F. Our lower Target Price is in line with the reduction in our earnings forecast for FY20- 21F by 8-10%.

Earnings drag to stem from higher interest costs and lower foodcourt margins.

• Our assumptions for the Food Junction acquisition are:
  1. acquisition debt of S$50m along with our assumed interest cost of 2.5-3.5%; and
  2. the fifteen Food Junction outlets will contribute to revenue but we impute lower operating margins at Food Atrium Division in FY20F due to Food Junctions’ lower profitability.
• Our FY20-21F revenue projection is raised by 6% while operating profit margin assumption for FY20F is lowered to 8% (from 10% previously) before normalising to 10% by FY21F.

S$80m acquisition consolidates BreadTalk’s position as third largest foodcourt player in Singapore:

P/B valuation higher than Koufu’s trading multiple in the market:

Anticipate strengthening market share/operational network and cost synergies in the longer term.

Prefer Koufu to BreadTalk at This “Junction”

• We continue to like Koufu Group (SGX:VL6) which is a BUY on favourable valuations and better growth traction, while our call on BreadTalk remains a HOLD as we believe earnings drag from the acquisition will limit upside.

Source: DBS Research - 5 Sep 2019