Friday, November 8, 2013

BreadTalk Group: Same ol’ same ol’ (OCBC)

BreadTalk Group:
Fair value S$0.77
add: 12m dividend forecast S$0.01
versus: Current price S$0.91
Same ol’ same ol’

BreadTalk’s 3Q13 results exhibited the same traits as before. Revenue and operating profit increased following top-line growth across all three operating segments but operating margins remained depressed. In the coming quarters, we expect this trend to persist, especially with its new stated goal of having S$1b in revenue by 2016 and 2,000 stores by 2018. In our view, achieving these goals will be challenging in such a short-time as even our moderately optimistic medium-term projections has them missing the mark. More importantly, we feel that group has to address margin declines sooner rather than later as revenue growth without corresponding bottom-line increases via margin improvements will be hollow. Until then, we maintain SELL on BreadTalk with an unchanged fair value estimate of S$0.77.


Similar story plays out again
BreadTalk’s 3Q13 results exhibited the same traits as before. Revenue and operating profit grew 22.2% YoY to S$142.6m and 23.4% to S$6.4m, respectively, following revenue growth across all three operating segments. However, operating margins remained depressed with operating profit margin unchanged YoY at 4.5% and higher interest expenses eroding PATMI margin by 0.5ppt to 2.4%. As a result, PATMI was relatively the same at S$3.4m from the same period a year ago.

Are new goals achievable and suitable?
Based on its 3Q13 results, we project that FY13’s revenue growth will slower as compared to previous years, and this raises concerns over BreadTalk’s ability to achieve its new goal of S$1b in sales by 2016 as even our moderately optimistic medium-term projection has them missing the mark. More importantly, an area of greater concern to us is this focus on top-line growth without corresponding attention on improving its performance margins, which have fallen over the years. Declining margins will erode the financial health of the company and may not serve its best interests in the long run. We also raise concerns with its target of 2,000 overall stores by 2018. In our view, an outright store target may result in management pursuing store openings without considering the related opportunity cost.

Maintain SELL
To be clear, BreadTalk has a capable management team that has grown the business considerably over the years. However, we feel that the group has to address margin declines sooner than later. Unless that action is taken, investors are likely to see continued margin compression in the coming quarters from higher interest and operating expenses, and dividend yields are also expected to remain unattractive at ~1%. Maintain SELL with an unchanged fair value estimate of S$0.77.


Source/Extract/Excerpts/来源/转贴/摘录: OCBC-Research,
Publish date: 07/11/13

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