Fair value S$0.77
add: 12m dividend forecast S$0.010
versus: Current price S$0.96
Why the rush?
• Recent appreciation unwarranted
• Investors paying ahead of results
• No takeover story at this point
With BreadTalk’s share price seemingly poised to cross the S$1 barrier again, we remain steadfast in our analysis and assertion that valuations are stretched at current levels.
While the group’s growth proposition appears attractive, realizing future potential takes time, and more importantly, carries significant operating and execution risks. Its operating margins have also remained in the low single-digit region. Furthermore, the group’s valuation is expensive when compared to more established regional peers that compete in the same markets. We maintain our SELL rating with an unchanged fair value at S$0.77, and will look to re-rate the stock only when its margins arrest their decline and operations approach a steady-state. A takeover angle at this juncture is also unlikely as we do not envision MINT launching a takeover bid anytime soon in the coming quarters at current price levels.
Too fast too much too soon
With BreadTalk’s share price seemingly poised to cross the S$1 barrier again, we remain steadfast in our analysis and assertion that valuations are looking stretched at current levels. BreadTalk’s growth prospects appear attractive: i) targets emerging consumer markets such as China and Taiwan, ii) owns a high-profile bakery brand and franchise rights to the popular Din Tai Fung restaurant, and iii) operates a chain of domestic food courts. However, realizing future potential takes time, and more importantly, carries significant operating and execution risks. With BreadTalk currently trading at a trailing twelve month (TTM) PE of 22.4x, which is an all-time high for the group since its listing in 2003, it appears that the current price has already priced in the future potential of its business. As a recap, from FY09-12, the group’s operating profit and PATMI only grew by a CAGR of 4.6% and 2.7% respectively, despite revenue increasing by a CAGR of 22.0%. Operating margins also remained in the low single-digit territory, and we expect this trend to continue in the coming quarters.
Valuation is high versus peers
Because of these low operating margins, it is hard to justify BreadTalk’s current valuation against its more established regional peers in the bakery or restaurant segments that compete in the same markets. In our comparison, the average gap can be as wide as 8ppt.
No takeover from MINT; maintain SELL
MINT’s recent addition to its shareholdings notwithstanding, we reiterate our stand that a takeover is unlikely at this point. We maintain our SELL rating with an unchanged fair value at S$0.77, and will look to re-rate the stock only when its margins arrest their decline and its operations approach a steady-state.
Publish date: 19/09/13