Yahoo Finance 
SI Research: BreadTalk – Can The Climb Continue?
Singapore’s food and beverage (F&B) industry contributed about $14.4 billion to the nation’s gross domestic product, according to a report by Food Industry Asia. With that much money to be made, competition is intense; this is coupled with our tight labour market and rising cost of goods which makes it increasingly hard for businesses to remain profitable.
Standing firm in the midst of a challenging economy, BreadTalk established itself as a renowned household brand that has withstood the test of time. With the first outlet being opened at Bugis Junction in 2000, BreadTalk has now expanded substantially, owning eight different brands under the group, including Toast Box, Food Republic, RamenPlay etc.
The Business
BreadTalk’s business needs little introduction as the group operates through three segments: bakery, food atria, and restaurants. With 862 stores in Asia and the Middle East, the bakery division accounts for half of the group’s revenue, while the restaurants and food atria makes up the remaining 24 percent, and 26 percent respectively.
Shareholders of BreadTalk have many reasons to rejoice. Since November 2016, the share price has been increasing by about 47.5 percent to $1.475 as at 12 May 2017. Besides that, BreadTalk also recently reported strong growth in 1Q17, reporting a 377 percent growth in net profit to $10.7 million.
What exactly is fuelling the persistent climb in the price of BreadTalk’s shares? Can the share price climb any further or should investors exercise caution when investing in this stock?
Declining Revenue Could Be Temporary
As the Oracle of Omaha, Warren Buffett, once said “our favourite holding period is forever”. To hold on to a stock for long term, we need to be investing in a value stock that has the potential to generate sustainable profits.
Source: Shares Investment
One glance at BreadTalk’s revenue growth and one should notice its decelerating trend. It may be a matter of concern for investors when growth turned negative in FY16 and following through in 1Q17. Compared to the previous year, revenue has fallen further by 4.5 percent to $154.6 million.
Citing reasons for the slowdown in top line, the group explained that this is due to its consolidation efforts (especially in China) to shut down underperforming outlets and focus resources on growing the better performing ones.
The group has also continued to open up new outlets with high growth potential, such as in Shanghai Disneyland. As such, we are confident that the group’s slowdown is temporary and it is a matter of time before the group returns to its growth path.
Improving Profitability
Over the past few years, BreadTalk consistently operated with a gross margin around 55 percent. However, net margin declined in FY15 despite recording the highest revenue in the past five financial years. Correspondingly, the group’s net profit fell from its peak of $22.2 million in FY14 to $7.6 million in FY15. This justified the group’s decision to reduce the number of less-profitable outlets which are costlier to operate.
As a result of the BreadTalk’s consolidation, the group’s net profit was lifted in FY16 where it reported a net profit of $11.4 million on a 1.9 percent net margin.
In the latest 1Q17, the group’s net profit rose more than four times to $10.7 million, lifted by a one-off $9.3 million gain on disposal of its stake in TripleOne Somerset.
Excluding one-off items, core F&B business net profit for 1Q17 was $3.1 million, compared to a net loss of $5.4 million in 1Q16. The improvement in the group’s financial performance was better due to cost efficiencies achieved through lower distribution, selling and administrative expenses.
Strengthening Balance Sheet
One major concern with the expanding group was its substantial increase in debt. During FY13 when the group expanded aggressively, it had a debt-to-equity ratio of 162.3 percent. It has since come down to 102 percent.
The group has since taken steps to reduce its leverage and improve on liquidity and solvency ratios. Its current ratio improved to one from 0.6 in FY14, addressing concerns that they might default on payments. Furthermore, BreadTalk decreased its net debt to $60.7 million from $106.8 million in 2015. Debt-to-equity ratio has also consistently fallen from FY14 onwards. Overall, the amount of debt taken on by the group is at a healthier level. Going forward, investors can expect debt ratios to improve as the group slow down its pace of expansion.
Return on equity (ROE) improved in 1Q17 to 31.5 percent from 9.3 percent in 1Q16. In FY16, ROE stood at 11.8 percent, a slight improvement from FY15 with the lowest recorded ROE in the past 10 financial years. Since ROE increases with higher leverage, as the group reduces its debt and goes through consolidation, a decrease in ROE is expected. However, when the group’s consolidation effort pays off and net income increase, investors can expect higher ROE ahead.
A major strength of the group is found in its cash flow statements. Ever since 2002, it has been consistently recording positive operating cash flow which reached an all-time high of $85.2 million in FY16. It is notable that investing cash outflow has decreased substantially from $126.7 million in FY12 to $21 million in FY16 following a slowdown in expansion. On the other hand, cash from financing has been decreasing as more cash is spent on repaying debts.
Peer comparison
Source: Shares Investment
Following the increase in BreadTalk’s share price, how does it fare when compared to some of its competitors in the F&B industry?
Based on the trailing twelve months earnings-per-share of $0.07, and the current trading price of $1.48, BreadTalk’s current price-to-earnings is at 21.2. This is lower than its competitors and its share may not be overpriced despite its recent spike. However, investors should note that the share does not provide the highest dividend yield possible for those looking out for stocks to increase their passive income.
Future Prospects
Operating in the extremely competitive F&B business, BreadTalk looks to expand its business into different markets to diversify its revenue. One such upcoming project is the introduction of Din Tai Fung into the European market. In addition, the first BreadTalk outlet was opened in Yangon, Myanmar in March this year through a franchise agreement.
In the challenging F&B market, uncertainty remains as to whether their overseas venture will pay off. The group received some good news in FY16 when the group’s joint venture in Thailand finally turned profitable after seven years.
In the future, if the group is able to replicate their success in Thailand, it will be able to generate significant sources of income from Myanmar and Europe. However, investors should note that this will take quite some time to materialise. The management’s prudent approach of slowing down expansion to avoid carrying too much debt will also help to reduce leverage risk. Holistically, BreadTalk seems to be poised for more sustainable growth and investors looking to invest for the long haul should include this stock in their watchlist.
