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BreadTalk Group (BREAD SP) Summary

Core Content

BreadTalk Group (BREAD SP) is a Singapore-based company in the Consumer Staples sector, with a current share price of SGD1.48 and a target price of SGD1.95 (+32%). The company's market capitalization is USD335M, and its average daily trading volume is USD0.6M. The report highlights the company's BUY rating and its potential for growth, particularly in the China market.

Key Financial Performance

• 1Q14 Results:

  • Net profit attributable increased by 11.6% YoY.
  • Revenue grew by 16.7% YoY, driven by all three business segments.
  • Operating margin weakened by 3.2ppts QoQ but remained 2.9% YoY.
  • The food atrium segment was the star performer with a multi-fold improvement in the bottom line, while bakeries saw a 6.5% YoY decline due to higher labor costs.

• Earnings Forecasts:

  • Revenue is expected to grow from SGD447.3M (FY12A) to SGD879.6M (FY16E).
  • EBITDA is forecasted to rise from SGD49.6M (FY12A) to SGD103.4M (FY16E).
  • Core net profit is projected to increase from SGD12.0M (FY12A) to SGD25.1M (FY16E).
  • Core FDEPS is expected to grow from 4.3cts (FY12A) to 8.9cts (FY16E), with a 28.1% YoY growth in FY16E.
  • Net DPS is anticipated to increase from 1.5cts (FY12A) to 3.2cts (FY16E).

• Valuation Metrics:

  • Core FD P/E is expected to decline from 34.8 (FY12A) to 16.6 (FY16E).
  • P/BV is forecasted to drop from 5.0 (FY12A) to 3.2 (FY16E).
  • EV/EBITDA is projected to decrease from 8.0 (FY14E) to 4.6 (FY16E).
  • Net dividend yield is expected to increase from 1.0% (FY12A) to 2.2% (FY16E).
  • ROAE is anticipated to grow from 13.9% (FY12A) to 17.7% (FY16E).
  • ROAA is projected to rise from 3.3% (FY12A) to 4.9% (FY16E).

Growth Opportunities

• Multi-format F&B Model: BreadTalk operates through bakeries, restaurants, and food courts, leveraging the different characteristics of each to enhance the group's value.
• China as the Growth Driver: The company aims to double its group revenue to SGD1B by FY16E, with China contributing 50% of total revenue.
• Franchise Expansion: BreadTalk manages Din Tai Fung franchises in Singapore and Thailand, with plans to expand into other markets, including Guangdong Province, China, and the Philippines.
• Strategic Real Estate Investments: The company has secured strategic retail locations through investments in Chijimes, TripleOne Somerset, and 112 Katong, which are expected to provide long-term value.

Strategic Partnerships

• MINT International: A key shareholder, with an 11% stake, could be an important partner in expanding the Din Tai Fung brand in Thailand.
• Self-owned Outlets: BreadTalk has a 351 outlet portfolio, with self-owned outlets valued at SGD286.5M. The replacement value of these outlets is estimated at SGD460.7M, with a per share value of SGD0.43.

Market Position and Peer Comparison

• Peer Comparison:
  • BreadTalk is rated BUY, with a target price of SGD1.95.
  • Jollibee F. and Minor International PCL are also rated BUY.
  • Centel Tb is rated Hold.
  • BreadTalk's EV/EBITDA is expected to be 8.0x (FY14E), which is higher than its peers.
  • The company's P/BV is 4.0x (FY14E), compared to the average of 3.9x for its peers.

Risk and Challenges

• Operating Costs: Rising operating costs in Singapore pose a risk, but the company has pricing power and scale to mitigate this.
• Location Challenges: In Thailand, securing good retail locations has been a challenge, but the company is exploring partnerships to overcome this.

Conclusion

BreadTalk Group is a BUY recommendation based on its growth potential in China, diversified business model, and strategic real estate investments. The company's target price of SGD1.95 is derived from an 8x FY14E EV/EBITDA multiple. Despite seasonally weaker 1Q14 results, the company is expected to maintain growth in the coming years.