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BreadTalk 270313

BreadTalk 270313

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Published by metallickgoz
BreadTalk
BreadTalk

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Published by: metallickgoz on Apr 11, 2013
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09/12/2013

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SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS
Company Update
 
27 March 2013
Singapore
 
Co. Reg No: 198700034EMICA (P) : 099/03/2012
 
BreadTalk Group
Have a MINT, Have a BreadTalk
 A prized jewel to be swept up.
Primacy Investment, a wholly-ownedsubsidiary of Minor International (MINT) in Thailand, surfaced as ashareholder in January and purchased an additional 2.58% last week atan average of SGD0.83 a share, reaffirming our suspicions that Minormay just be getting started. As one of the largest hospitality and leisurecompanies in Asia, MINT has a track record of acquiring establishedrestaurant brands, namely Coffee Club and Thai Express in Singapore.With BreadTalk’s premium reputation as a bread operator, andentrenched position in Asia, this could be the prized jewel which Minorhas been waiting for.
Who is Minor International (MINT)?
MINT is a hospitality businessheadquartered in Thailand. It operates over 1,300 restaurants and 80hotels and resorts in Asia, the Middle East and Africa, and also has 200retail outlets for lifestyle brands. In recent years, MINT has beensteadily building up its restaurant brand portfolio, and recently acquiredRiverside & Courtyard restaurant in China in Dec 2012 and ThaiExpress in Dec 2011.
Highly desirable brands all packaged into one.
In our view,BreadTalk offers MINT an excellent portal to extend its cross-sellingchannels, as well as an opportunity to strengthen and add prominentbrands to its growing overseas portfolio. BreadTalk is a leading bakerychain in Singapore, which has restaurants and cafes also figuringprominently in its portfolio. In China, it has acquired a reputation as apremium bakery operator and is poised to take advantage of thecountry’s rising affluence. BreadTalk’s established ties with localbusinessmen through franchising and JV agreements have also helpedspur its growth in China and facilitate access to domestic resources.
What Minor could offer to BreadTalk in return.
We believe if BreadTalk wants to achieve greater success in China, it may have to join hands with large F&B conglomerates. The support of strong parentcompanies offers leverage and better expansion opportunities forbakery chains. For example, Saint Honore Holdings was privatised byConvenience Retail Asia (CRA), one of Li & Fung’s subsidiaries, for15.6x 2006 PER. Maxim Caterers Hong Kong, an equally strongcompetitor, is 50% owned by Dairy Farm International.
Deserving of more premium valuations.
Current valuations of BreadTalk are below peers with a forward consensus P/E of 15.6xagainst 16.5x. Granted BreadTalk’s valuation is not too far off its peers.One reason may be MINT believed that BreadTalk’s profits areunderstated by its expansion costs and the stock will look cheap oncethe expansion phase slows. We believe BreadTalk deserves a morepremium valuation for its multi-country success in growing its bakerychain.
Not Rated
Share price: SGD0.875Target price: n/a
 Alison FOKalisonfok@maybank-ke.com.sg(65) 6432 1447
Stock Information
Description:
BreadTalk Group Limited manufactures andretails a variety of food, bakery, and confectionery products.The Company also operates food and drinks sale outlets,eating houses, and restaurants.Ticker: BREAD:SPShares Issued (m): 280.6Market Cap (USD m): 197.93-mth Avg Daily Turnover (USD m): 0.4ST Index: 3,288.5Free float (%): 36
Major Shareholders:
George Quek & Wife 52.7Primacy Investment 8.85
Key Indicators
 
ROE (%) 14.5Net gearing (x): 0.4NAV/shr (SGD): 0.3
Historical Chart
Performance:
 52-week High/Low SGD0.89/SGD0.461-mth 3-mth 6-mth 1-yr YTD Absolute (%)15.1 29.6 50.9 53.6 28.7Relative (%)13.9 25.4 39.8 38.9 23.9
 
27 March 2013 Page 2 of 9
 
BreadTalk GroupBreadTalkSummary Earnings Table
FYE Dec (SGDm)20082009 2010 20112012
Revenue212.2 246.5 302.9 365.9 447.3EBITDA27.0 33.0 38.2 41.4 49.6Recurring Net Profit 7.8 11.1 11.3 11.6 12.0Recurring Basic EPS (SGD cts)2.8 3.9 4.0 4.1 4.3EPS Growth (%)6.2 42.8 1.6 2.9 3.5DPS (SGD cts) 1 1 1 1.5 1.3PER (x)31.7 22.2 21.8 21.2 20.5EV/EBITDA (x) 7.9 6.2 5.1 4.8 5.6Div Yield (%)1.1 1.1 1.1 1.7 1.5P/BV (x)4.7 4.1 3.6 3.2 3.0Net Gearing (x)-0.6 -0.7 -0.8 -0.6 0.4ROE (%)14.8% 18.3% 16.4% 14.9% 14.5%ROA (%)5.3% 6.4% 5.5% 4.4% 3.4%
Source: Company
Enter Minor International (MINT).
MINT is a hospitality businessheadquartered in Thailand. It operates over 1,300 restaurants and 80hotels and resorts in Asia, the Middle East and Africa, and also has 200retail trading outlets for lifestyle brands. Its quick service restaurantportfolio includes Swensen’s, The Coffee Club, Thai Express, Xin WangHong Kong Café, New York New York, Shokudo, Dairy Queen andSizzler.
Strong distribution network allows cross-selling.
PrimacyInvestment is the investment arm of MINT, with a focus on foodbusiness overseas. It acquired Riverside & Courtyard restaurant inChina in Dec 2012 and Thai Express Concepts in Dec 2011. In ourview, BreadTalk offers MINT an excellent portal to extend its cross-selling channels, as well as a unique opportunity to add prominentbrands to its growing overseas portfolio.
Tap into China’s changing consumption behaviour.
 The food habitsof the Chinese in China are becoming increasingly Westernised.According to Euromonitor, the market for baked goods such as bread,pastries and cakes could grow from CNY7.8b in 2010 to CNY11.1b by2015. Large bakery chains with an entrenched position in theirrespective local markets are expanding aggressively in search of furtherearnings growth. BreadTalk’s established ties with local businessmenthrough franchising and JV agreements should help spur its growth inChina and facilitate access to domestic resources.
Figure 1: Bakery chains with operations in China
Bakery chain Home base Expanding to Via
BreadTalk Singapore China FranchisingChristine Int’l Shanghai Yangtze River OwnershipMaxim Hong Kong Guangzhou OwnershipSaint Honore Hong Kong Guangzhou Ownership85C Taiwan Shanghai Ownership (moving intofranchise)
Source: Company data
Better margins and cash flow than competitors.
 To keep costs incheck, BreadTalk franchises a portion of its bakeries to localbusinessmen and is also on the lookout for suitable retail space. Itcurrently is involved in three investments in Katong 112, Chijmes and Tongzhou district in Beijing. These investments will offer the groupopportunity to secure prime retail space,
a la
its investment in 112Katong, as well as higher interest income. Margins-wise, BreadTalkappears to have achieved greater stability than its competitor ChristineInternational during between 2009 and 2012. Between 2008 and 2011,
 
27 March 2013 Page 3 of 9
 
BreadTalk Group
the group also reported positive free cash flow at an average of SGD11.3m. Accordingly, EBITDA has increased in tandem with salesgrowth.
Figure 2: Margin comparisonbetween BreadTalk and Christine
Christine International BreadTalk2009 2010 2011* 2012 2009 2010 2011 2012
Operating profit 14.61% 9.14% 9.49% 2.10% 6.11% 5.76% 4.40% 4.03%Pretax profit 14.51% 9.09% 9.39% 2.13% 5.85% 5.69% 4.28% 4.10%
Source: Company data * IPO year 
 
Figure 3: BreadTalk profit track record
Source: Company data
Profits are understated, but rebound uncertain.
EBITDA has beengrowing in tandem with revenue, with 5-year revenue CAGR of 16% vs.EBITDA’s 13%. Depreciation and amortisation costs are high due toexpansionary and renovation costs for its bakeries and food courts. This led to slower net profit CAGR of 9.1%. Though we are uncertainwhen BreadTalk’s expansionary phase will end, Minor may believe itrepresents an undervalued gem once profits rebound.
Strong parent companies a boon.
Some of the larger bakery chainshave the support of financially strong parent companies. For example,Saint Honore Holdings holds retailing operations in Hong Kong,Guangzhou, Macau and Shenzhen. It was privatised in November 2006by Convenience Retail Asia (CRA), one of Li & Fung’s subsidiaries, for15.4x 2006 PER. Maxim Caterers Hong Kong, an equally strongcompetitor, is 50%-owned by Dairy Farm International. The support of strong parent companies offers leverage and better expansionopportunities for bakery chains.
By itself, BreadTalk may not be strong enough.
BreadTalk’s founderGeorge Quek and his wife currently own a 52.7% stake in the group.Despite the tremendous success of the group’s retail operations inSingapore, consumer demand in the Republic is still not comparablewith China’s. If BreadTalk wants to achieve greater success in China,we believe it may have to join hands with large F&B operators orconglomerates.
0501001502002503003504004502008 2009 2010 2011 2012Revenue EBITDA Net profit
5-r CAGR16.1%5-r CAGR13.0%5-r CAGR9.1%

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