• A conditional cash offer of SGD0.77/share was made by George Quek, Katherine Lee and Minor Group to delist BreadTalk Group (SGX:CTN). Shareholders should accept it, as the offer price is 15% above our previous target price of SGD0.67.
• Moreover, BreadTalk is undergoing major challenges across key markets, and reported losses for FY19. A quick turnaround is unlikely, with the COVID-19 outbreak further exacerbating the situation.
• The offer presents a good opportunity for shareholders to realise their investments. Accept offer, 19% upside.

4Q19 Results Are Below Expectations

• BreadTalk Group’s 4Q19 loss of SGD8.1m took the FY19 total to a loss of SGD5.2m. Excluding fair value gains, FY19 core F&B losses widened to SGD11.7m. This was mainly attributed to losses across China, Hong Kong, Indonesia and Thailand in the bakery division, and gestation costs for new store openings in the 4orth division.
• The group also recorded SGD6.1m of impairments due to the closure of bakery outlets.

Near-term Challenges to Intensify Due to COVID-19 Outbreak

• BreadTalk’s food and beverage (F&B) retail business is highly exposed to markets that are disrupted by the virus epidemic. As at FY19, 56% of revenue is derived from Singapore, while 31% is from Greater China (Mainland China and Hong Kong).
• We expect Singapore sales to dip 3- 5% y-o-y while sales from Greater China could fall > 10% y-o-y this year. This would have a negative impact on operating leverage.
• There may also be more store closures in FY20 in the bakery division, and a slower turnaround from the 4orth division.

Offer Is Fair

• The offer price represents premiums of 30%, 24% and 25% over the volume-weighted average price (VWAP) per share for the 1- month, 3-month and 6-month periods respectively, up to and including 21 Feb. The offer price also implies 34x FY18 P/E and 2.9x FY20F P/BV.
• After excluding the fair value of the investment properties and investment securities (SGD245m), the offer price still implies a decent 15x P/E, based on FY18 core F&B PATMI of SGD12.7m (FY19 recorded a loss while we estimate FY20 earnings to remain sub-par due to the COVID-19 outbreak). This is in line with the Singapore-listed food service retailers’ average, despite its weaker outlook.

Time to Cash Out

• The near-term outlook is very challenging. Although George Quek previously publicised his targets to grow the group’s market cap to > SGD1bn and raise its net margin to 8% by FY22, we think they would require a much longer timeframe to realise – given the current difficult operating environment and losses across key markets of the bakery division.
• We recommend that shareholders exit their investment with this offer.

Source: RHB Invest Research - 26 Feb 2020