More than just bread
Breadtalk’s share price has risen 27.9% YTD. We believe this reflects an increased investor interest in the F&B sector as well as the group’s extensive retail presence in the region. Minor International’s 11% stake continues to drive expectations of a general offer.
Breadtalk is still in an expansion phase and its debt levels are high as it had to take on additional debt to fund its international headquarters. Its revenue continues to grow yoy, but the gross and net profit margins have suffered. Benchmarked at 16.6x CY14 P/E (1 s.d. above its 6-years historical average), the stock could be worth S$0.86 per share.
The China story
Breadtalk has pursued a strategy of rapidly increasing its stores (22.3% yoy in FY12), with a focus on China. So have its competitors. The market appears to be pricing in the China story. The current price also reflects the possibility that Breadtalk’s profit margins might improve as it settles into a more moderate growth phase in the future. In our view, any weakness will provide a buying opportunity.
History of delivering
Breadtalk has consistently reported profits since FY05, and the profit growth has been due to the group’s strategy of footprint expansion. The group has also been consistently cash accretive, except in FY12 when it had an increased capex. The recent slowdown in its performance may be attributed to the reorganisation of its operations in some of its divisions as it seeks to cement its position in China. The group has also signalled its plans to rein in the growing operating costs.
Keep an eye on gearing
The company’s debt is likely to remain at an elevated level for the next few years due to the higher capex. The group has moved from a net gearing position of 0.39x as at end-12 to a net gearing of 0.87x as at end-2Q13. The recently completed international HQ can be expected to streamline the processes and improve operating margins. However, the wage pressures in the countries it operates in should be closely watched.
Publish date: 11/09/13