BreadTalk Group Limited - Should it quit its expansion plans – which of the brokers is right?

10/4/2013– Thai hospitality company Minor International (MINT) has recently increased its stake in BreadTalk to 10%, which has fuelled rumours about a takeover.

Minor International operates more than 1,300 restaurants and 80 hotels and resorts in Asia, the Middle East and Africa, and also has 200 retail outlets for lifestyle brands.

In recent years, MINT has been building up its restaurant brand portfolio, and bought Riverside & Courtyard restaurant in China in December 2012 and Thai Express in December 2011. It also owns Coffee Club in Singapore.

Brokers are divided the possible of takeover by MINT and also over the fundaments of the company which does not commensurate with the share price.

Bullish analyst report


Maybank Research believes that if BreadTalk wants to achieve greater success in China, it may have to join hands with large F&B conglomerates like MINT.

The support of strong parent companies offers leverage and better expansion opportunities for bakery chains.

For example, Saint Honore Holdings was privatised by Convenience Retail Asia.

Maxim Caterers Hong Kong, an equally strong competitor, is 50% owned by SGX listed Dairy Farm International.

MINT must have increased its stake to 10% on a belief that BreadTalk’s profits are understated by its expansion costs and the stock will look cheap once the expansion phase slows.

The house thinks BreadTalk offers MINT an excellent portal to extend its cross-selling channels, as well as an opportunity to strengthen and add prominent brands to its growing overseas portfolio.

BreadTalk is a leading bakery chain in Singapore, which has restaurants and cafes also figuring prominently in its portfolio.

In China, it has acquired a reputation as a premium bakery operator and is poised to take advantage of the country’s rising affluence.

BreadTalk’s established ties with local businessmen through franchising and joint venture agreements have also helped spur its growth in China and facilitate access to domestic resources.

Hence, the analyst thinks it deserves a more premium valuation for its multi-country success in growing its bakery chain.

Maybank research wrote a 9 page report on BreadTalk but it did not provide a rating to the stock.

However, it believes the stock has a potential to perform.

Bearish analyst report


OCBC Research says 12% correction in BreadTalk’s share price has helped temper the sudden spike due to rumours of potential takeover by MINT.

It believes that a takeover at this juncture is an unlikely because its chairman, George Quek, holds about 53% along with his wife.

This is a stumbling block for any general offer.

Moreover, BreadTalk is far from being a polished product so any acquisition will encompass significant risks.

For instance, its operating margins have narrowed due to on-going expansion but the pace of their declines has led to some concerns over future margin stability.

The analyst says management has to show that it is able to deliver healthier growth to its bottom line beyond just impressive double-digit revenue growth.

Failure to do so will result in the perception that BreadTalk is operational deficient, and this will dilute its appeal to suitors or result in an unfavourable valuation.

OCBC Research downgraded BreadTalk to SELL from HOLD with a target price of S$0.77, because it believes the share price has run ahead of its fundamentals.

The analyst goes on to say margins are unlikely to improve in FY13, nor is there likely going to be an increase in dividends.

In fact, the forecast yield is an unattractive 1.3% at the current price.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Should it quit its expansion plans?

Question

2. Has Dr Quek and/or his wife had discussions with Minor International?

And what was the outcome of such discussions, if they took place?

Are they going to sell down their stakes? Or sell into a general offer?

Question

3. BreadTalk’s price-per-share is almost four times higher than its book value-per-share?

Would Minor International be interested in a take-over at such premiums?

Question

4. Should BreadTalk quit its expansion plans to improve margins?

Question

5. When will its bottom line get relief from cost pressures?

BreadTalk’s Q4 FY12 results saw a 19.1% YoY increase in revenue and a 5.7% operating profit, on the back of higher same-store sales across all business segments during the yearly peak season.

But margins declined due to higher costs – the worst they have been since FY07 – and the company is still five years away from achieving its stated goals.

Question

6. Does the company agree with this assessment? Will it really take another five years?

Question

7. How does it intend to grow aggressively in China?

Question

8. Wouldn’t it be better to team up with a larger company, than to try all this expansion alone?

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

Sofar, we have not had a reply (which is why you are seeing this message).


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