We  believe  BreadTalk's  diversified  offerings  and  mass  market  prices will continue to thrive despite the weak spending environment.  We trimour SGD1.90  TP (38.7% upside) but  reiterate our BUY  call as the stock remains undervalued, trading at just 6x FY15F EV/EBITDA. In our recent discussions  with  the  company,  we  are  happy  with  its  more  moderate store  expansion  strategy  going  forward,  which  we  believe  will  boost bottomline margins. 

Expanding  the  Food  Atrium division.  Going  forward,  we  expect  this division, which currently contributes about 25% of group profit,  to be an important  pillar  of  growth.  The  company  has  store  expansion  plans, especially in  China, where this concept is still relatively new  but popular. The company is targeting 100 food courts in the medium  term (currently 63).  YTD, this division has been a strong performer, with positive  samestore  sales  growth  (SSSG)  across  all  markets  and  a  positive  profit  impact from tax restructuring.

Land  of  Smiles  to  bring  more  cheer.  As  part  of  its  JV  agreement signed  in  Aug  2014  with  substantial  shareholder  Minor  International(MINT TB, BUY, TP: THB40.00), we expect  this  50-50 JV to significantlyexpand the number of bakeries in Thailand, with an eventual  goal of 100-150  outlets  (currently  23).  Minor  will  be  involved  in  the  day-to-day operations, and its  expertise in Thailand will be invaluable. W e believe this collaboration may extend further into restaurants and food courts.  

Streamlining  businesses.  Singapore  has  been  a  challenging  market this year, due to the higher operating expenses from labour and rent. We expect store expansion to be moderate and opportunistic going forward.Write-offs  (estimated  SGD2m)  have  already  been  taken  at  the  underperforming  RamenPlay  this  year.  We  expect  this  business  to  be streamlined going forward, in concert with a rebranding exercise.

Focusing on the bottomline,  maintain BUY.  Over the last decade,  it has been aggressively opening new  stores, often weighing  down on  the bottomline  in  the  form  of  depreciation.  Going  forward,  we  expect  the focus to be on increasing margins rather than revenue. We moderate our FY15F-FY16F  earnings  estimates  by  7-8%,  but  maintain  BUY  with  a lower SGD1.90 TP (from SGD2.00), based on 7.5x FY15F EV/ EBITDA.

Expanding  the  Food  Atrium  division,  especially  in  China.  Going  forward,  we expect this division, which currently contributes about 25% of group profit,  to be an important pillar of  growth.  The company has 63 food courts currently across various markets and has store expansion plans to reach 100 food courts in the medium term. This would help make the revenue base more stable.

YTD,  this  division  has  been  a  strong  performer,  with  a  positive  SSSG  across  all markets  and  a  positive  profit  impact  from  tax  restructuring.  Management  has identified other measures to increase profitability in this division, including reducing the store-turnover downtime. We expect about half of this increase to be in China, where BreadTalk has  32  Food Courts, mostly in tier 1 cities. Part of this plan would likely involve expanding further into  2nd and  3rd tier  cities,  where  there  are  long-term  leases  available  at  attractive prices. We believe this expanding  platform will help attract  better-quality tenants who are interested to expand overseas.

Initial collaboration with Minor International . On 1 Aug 2014, BreadTalk signed an agreement with substantial shareholder Minor to establish a 50-50 JV company. This JV  will  operate  the  bakery  business  under  the  BreadTalk  brand  in  Thailand. BreadTalk injected its existing bakery business in Thailand (23 stores) into the JV. We  understand  that  Minor  International  will  be  taking  over  most  of  the  day-to-day operations,  and  its  expertise  in  Thailand  will  be  invaluable.  We  think  there  will  be procurement  synergies  with  Minor  International's  Pizza  Company  for  flour.  In  our view, this is the most sensible testing ground for closer collaborations between the two groups, given Minor International's experience in Thailand.

In the future, this  partnership  could possibly extend  further into  BreadTalk's Thailand restaurants  (currently  two  Din  Tai  Fung  restaurants)  and  two  food  courts.  Minor International  also  has  F&B  operations  that  share  the  same  geography,  such  as Singapore and China.

Streamlining  businesses  for  greater  profitability.  Singapore  has  been  a challenging market this year, due to higher operating expenses from labour and rent.Notwithstanding that, the restaurant division (mainly  Din Tai Fung  in Singapore) has the highest margin and is a cash-cow business. However, further expansion for  Din Tai  Fung  in  Singapore  is  likely  to  be  opportunistic,  given that there  are  already  15 stores.  Write-offs  (estimated  SGD2m)  have  already  been  taken  at  the  underperforming  RamenPlay  this  year. We  expect  this  business to  be  streamlined  going forward, in concert with a rebranding exercise.

Similarly for bakeries, expansion in Singapore is likely to be limited, given that there are  already  about 100  Toastbox/Breadtalk  outlets.  Further  franchise  expansion  in China  and  other  ASEAN  markets  represent  an  attractive  avenue,  given  the  lower 
investment costs.

Over the last decade, the company has been aggressively opening new stores, which have  often  weighed  down  on  the  bottomline  in  the  form  of  depreciation.  Going forward, we expect the  focus to be on increasing margins rather than revenue, which is a strategy that we welcome.

 

Source: OSK-DMG