Multiple  dough  for  growth. BreadTalk  Group  (BreadTalk)  operates  a multi-format  food  and  beverage  (F&B)  business,  which  has  createdvarious  avenues  of  growth  for  the  company.  In  our  view,  most  of  its brands  are  well-known  and  are  market  leaders  in  their  respective categories. For example, the company's new JV with Minor International (MINT TB, BUY, TP: THB40.00) would be a key driver  for its  expansion in Thailand, especially for its Din Tai Fungfranchise.  

Regional  footprint  appeals  to  potential  acquirers. BreadTalk  has more than 850 outlets under its umbrella. This includes more than 400 outlets  in  China,  where  it  has  presence  in  57  cities.  We  believe  this network is difficult to replicate and holds substantial appeal for  potential acquirers.  Minor  International's  11%  investment  in  the  company  is  atestament to that - and any further corporate action would be a bonus for BreadTalk shareholders. 

Substantial upside for margin improvements. Since listing in 2003, ithas grown its number of outlets at an unprecedentedpace to 850  from 28  in  11  years.  We  believe  capex  expenses  and  start-up  costs  haveweighed down on profitability and a moderation of these expenses,  as well  as  greater  business  scale  in  China,  would  present  substantial upside for its net margin to improve from 2.5% currently.  

Time to roll in the dough, initiate with BUY. Our SGD2.00 TP is based on a 7.5x FY15F EV/ EBITDA, a methodology we believe better reflectsunderlying cash earnings.  Even  then,  this is  almost a  50%  discount  to regional peers which are trading at an average of a14.4x EV/EBITDA. Our SOP cross-check, which leans heavily on the replacement cost for its retail network, derives a value of SGD1.76/share.

Investment Summary
Leading  F&B  retail  player  in  Singapore  and  China. BreadTalk  is  a  Singaporebased  F&B  retail  company  founded  by  its  current  chairman,  Mr  George  Quek,  in 2000.  It  owns  and  operates  several  brands  including  BreadTalk,  Toast  Box,  Food Republicand Din Tai Fung(via a franchise agreement). Domestically, we believe the company  has  built  itself  up  into  a  position  of  strength  and  would  be  difficult  to dislodge, given its operational excellence, innovation and scale. It also owns one of the largest bakery chains in China.

Regional footprint is difficult to replicate.The company has more than 850 outlets across 15 countries, from Asia to the Middle East,  including franchises. In China, it has a footprint of more than 400 outlets across 57 cities, putting it in a prime position to  benefit  from  rising  disposable  income  -  which  drives  artisan  bread  sales  and people  eating  out. We  believe  this  regional  network and  know-how  is  enviable,  as evident  from  Thai-based  F&B  player  Minor  International's  11%  investment  in  the company. Further corporate action would be a bonus for BreadTalk shareholders. Substantial  upside  from  margin  improvements. Since  its  listing  in  2003,  the company  has embarked  on  a  remarkable  store  count  expansion  program,  growing 
from  28  outlets  initially. While  this  has  driven  topline  growth,  net  profit  growth  has lagged behind, thanks to aggressive capex depreciation and start-up costs. We see significant  scope  for  net  margin  improvements  from  the  current  2.5%  level  (FY13) over  the  medium  to  longer  term.  This  would  come  from:  i)  the  moderation  of  its depreciation and amortization (D&A) expenses, ii) the greater scale of its business, especially in China.

Latent value. BreadTalk has built up a valuable network of stores - which is difficult to replicate, including time-to-market needed. We estimate the replacement cost to be  worth  SGD1.08/share  to  potential  acquirers.  It  also  holds  strategic  real  estate 
stakes, as well as its own building headquarters inSingapore, which can be used in a sale-leaseback  transaction  to  release  cash.  Our  SOP cross-check  values  the company at SGD1.76/share conservatively.

Initiate  coverage  with  BUY. We  initiate  coverage  on  BreadTalk  with  a  BUY recommendation  and  a  TP  of  SGD2.00.  Our  TP  is  based on  a  7.5x  FY15F EV/EBITDA,  a  methodology  to  better  reflect  underlying  cash  earnings  of  the company. This is still a big discount to regional peers which are trading at an average of a 14.4x EV/ EBITDA, despite BreadTalk's estimated 17.7% net profit CAGR over FY14F-16F.  Key  risks  to  our  call  include  a  higher  operating  cost  environment  in 
Singapore and asset write-offs from over-aggressivestore expansions.

Leading  F&B  retail  player  in  Singapore. BreadTalk  is  a  Singapore-based  F&B company founded by its current chairman, Mr George Quek, in 2000. It was listed on the Singapore Exchange (SGX) in 2003. We believe the company is the largest F&B retail player in its home market, in terms of domestic sales.

BreadTalk  operates  several  F&B  concepts  besides  its flagship  BreadTalk bakery, including  Food Republic(food courts),  Toast Box(bakery and Nanyang-style coffee) and RamenPlay (Japanese  Ramen  restaurants).  It  is  also  the  most  successful overseas  franchisee  for  Taiwanese-based  Din  Tai  Fung (Chinese  mid-range restaurants). With  the  exception  of  RamenPlay,  we  believe  BreadTalk  is  a  market leader in each of these categories. Given that Singapore is now a mature market with limited avenues for new retail F&B spaces, we thinkit is now difficult to dislodge the company from its position of strength, which was built up over the last decade.

Regional footprint stretches from Asia to the Middle East.Outside of its home market, the company has outlets across 15 countries, both through its own-operated stores and franchisees. This is supported by its global staff of more than 7,000. This regional footprint, which is still expanding, stretches across Asia to the Middle East, allowing the company to simultaneously tap into different growth markets. Outside of Singapore, its key markets are China and Hong Kong.

 

Into  the  dragon. Following  its  listing  in  2003,  the  company  started separate headquarters  in  China,  which  management  deemed  as  the  most  important  growth market  for  the  company.  For  the  last  decade,  it  has focused  on  this  market unwaveringly and now has a significant presence in  the country through its chain of BreadTalkbakeries as well as Da Shi Dai (大時代) food courts.

BreadTalkis now one of the biggest and most well-known bakery chains in China, with an estimated 400 outlets across 57 cities. In particular, it has a strong footprint in key  cities  of  Shanghai  and  Beijing  where  it  mostly  operates  its  own  stores. Management targets to double group revenue to SGD1bn by FY16F from SGD537m in FY13, with China expected to contribute 50% of group revenue in the same year. This implies almost tripling its revenue from Chinain the same period, to SGD500m from SGD173m in FY13.

Complementary  portfolios  are  attractive  to  Minor  International. Despite  Minor International's  vast  F&B  empire,  we  believe  BreadTalk's  business  portfolio  is  very complementary  to  the  former's.  Minor  International  mainly  operates  casual  dining restaurants  under  brands  like  Swensen's,  Sizzler,  Burger  King,  Thai  Express and Riverside.  BreadTalk,  on  the  other  hand,  has  a  much  bigger  presence  in  bakeries and food atriums.

We believe bakeries in particular are an attractivesegment for Minor International, given  the  scalability  of  the  business.  Minor  International  would  also  benefit  from leveraging on BreadTalk's presence and know-how in  China, where it has been for the  last  10  years  and  has  more  than  400  outlets  across  57  cities.  In  comparison, Minor  International  currently  has  42  outlets  in  China,  through  Riverside Beijing, Courtyard and  Sizzler.  BreadTalk  would  benefit  from  Minor  International's  strong 
presence in Thailand and Australia as well as its impressive procurement efficiency.

 

Partnership  for  now;  further  corporate  actions  would  be  a  bonus. Minor International  has made  numerous  acquisitions  over  the  last  decade  and it  typically holds  50-80%  stakes  in  these  businesses.  Given  the  potential  synergies  and BreadTalk's potential, we certainly think Minor International would be open to further investments. Such corporate actions, which may include the possibility of a takeover, would be a bonus for BreadTalk shareholders.

Hurray  to  more  Din  Tai  Fung outlets  in  Thailand. In  the  meantime,  Minor International  and  BreadTalk  have  an  official  joint  venture  agreement  to  operate BreadTalk  Thailand  through  a  50-50  partnership.  This  JV  currently  includes  23 owned and operated bakery outlets, two franchised  Din Tai Fungoutlets and three Food  Republic food  atria.  Given  Minor  International's  strong  retail  know-how  and bargaining strength in Thailand, we think this willallow BreadTalk Thailand to expand more aggressively than before. In particular, we believe BreadTalk would be able to secure more locations for  Din Tai Fungrestaurants in this market, where it currently holds the franchise for the operations in the country. BreadTalk has achieved great success in Singapore with the  Din Tai Fungfranchise and we are optimistic it can replicate this in Thailand.

Source: OSK-DMG