Fair value S$0.77
add: 12m dividend forecast S$0.010
versus: Current price S$0.95
Improvement in 2H13 unlikely
• 2Q13 results disappoint
• Non-performing restaurant brands a concern
• Maintain SELL
BreadTalk’s 2Q13 results disappointed despite double-digit revenue growth to S$126.5m as operating profit fell by more than expected (15.1% YoY to S$3.8m) and operating profit and PATMI margins remained low at 3.0% and 2.4% respectively. In the coming months,
we expect this trend to persist in light of its ongoing store expansion and the two non-performing restaurant brands (Ramen Play and Carl’s Jr), which will remain a drag on overall performance. With a FY13F dividend yield of 1.1%, the investment proposition is unattractive in our view and the counter remains expensive at current valuations, especially given the low-single digit margins. We maintain SELL on BreadTalk with an unchanged fair value estimate of S$0.77.
Higher opex eats into margins
BreadTalk’s 2Q13 results came in below expectations despite revenue increasing 20.7% YoY to S$126.5m. Higher operating expenses (+19.5% YoY to S$66.1m) – related in part to an ongoing restructuring exercise for its restaurant segment – caused operating profit to fall 15.1% YoY to S$3.8m and operating profit margin to slide 1.2ppt to 3.0%. PATMI came in almost flat (+0.7% YoY) at S$3.0m, missing our estimates by about 10%, for a net margin of only 2.4% versus 2.9% a year ago. In light of its 1H13 performance, management declared an interim dividend of 0.5 S cents, which was the same amount declared over the same period last year.
Concerns with non-performing restaurants
As with its 1Q13 results, BreadTalk’s bakery and food court operations continue to show improvements across the various geographical locations. Our main concern remains with the restaurant division, which saw sustained pressures related to the non-performing Ramen Play restaurants and Carl’s Jr outlets in China. Repositioning efforts over the past two years have failed to improve the appeal of both restaurants – and while we welcome the move to shut down three Carl’s Jr outlets in China (three still remaining) – it may be more prudent to call time on these ventures to prevent further erosion of Din Tai Fung’s stellar performance.
Margin improvement for 2H13 is unlikely given the ongoing store expansion (60 stores added in 1H13). In addition, investors will have to contend with higher interest expenses related to the financing of its new HQ, and the possibility of additional restructuring expenses for its two non-performing restaurant brands. Therefore, we reduce our 2H13 PATMI forecasts slightly and maintain our SELL rating on BreadTalk with an unchanged fair value estimate of S$0.77. FY13F dividend yield is expected to remain unattractive at 1.1%.
Publish date: 13/08/13