BreadTalk Group’s (BTG) 3Q12 revenue growth was stronger than expected but operating expenditure outpaced revenue growth. Cost pressures associated with food and raw materials saw gross margin fall to its lowest point since listing while higher staff and rental expenses depressed operating margins further. With BTG still focused on expanding its regional footprint, we expect margin pressures and low dividend payouts to persist, and revised our FY13 estimates downwards, which lowers our valuation from S$0.51 previously to S$0.49. Given BTG’s recent 7.1% appreciation since mid-Aug, the counter has emerged as expensive especially in the absence of a compelling near-term catalyst. We urge investors to take the opportunity to lock in profits at current levels, and re-enter when the price moderates lower. Downgrade to SELL.
Costs pinching harder
Although BreadTalk Group’s (BTG) historical 3Q pickup in revenue came in better-than-expected (+21.5% YoY to S$116.7m, exceeding our forecasts by 12.5%), higher food and raw material prices – combined with greater staff and rental expenses – saw operating expenditure (+24.5% YoY to S$115m) outpace revenue gains to reduce the improvement in operating profits to S$5.2m (+2.8% YoY). While net profit grew 6.0% YoY to S$3.9m, greater accordance of earnings to minority interests saw 3Q12 PATMI decline 7.7% YoY to S$3.4m.
Gross profit margin below traditional mark
For the first time since quarterly results were published by the Group, gross profit (GP) margin fell to its lowest point of 52.3%. Historically, GP margins had been hovering in the mid-54% range even in periods of rising cost pressures on raw material prices as the Group had been able to exercise effective procurement procedures i.e. bulk purchases and centralized sourcing. At this juncture, we deem that a turning point has potentially emerged given the ultimate limitations on cost savings centralized sourcing and bulk purchasing can bring.
Earnings estimates lowered
With the regulatory changes for labour hurting BTG more than expected and inherent difficulties in hiring service staff, BTG will likely see staff costs rising from its continued expansion. Furthermore, rental rates could be pushed higher with tight occupancy rates in retail malls. Therefore, we lower our FY13 operating and net profit to S$17.6m and S$10.3m respectively.
Expensive at this point
As we roll forward our 11x peg to the next four quarters, our fair value estimate falls to S$0.49 from S$0.51 previously. Since our last report issued on 13 Aug 2012, BTG has appreciated by 7.1%. In our view, BTG’s valuation at this juncture is rich given the likelihood of depressed margins and the absence of a generous dividend. We urge investors to take the opportunity to lock in profits at current levels, and re-enter when the price moderates lower. Downgrade to SELL.
Although BreadTalk Group’s (BTG) historical 3Q pickup in revenue came in better-than-expected (+21.5% YoY to S$116.7m, exceeding our forecasts by 12.5%), higher food and raw material prices – combined with greater staff and rental expenses – saw operating expenditure (+24.5% YoY to S$115m) outpace revenue gains to reduce the improvement in operating profits to S$5.2m (+2.8% YoY). While net profit grew 6.0% YoY to S$3.9m, greater accordance of earnings to minority interests saw 3Q12 PATMI decline 7.7% YoY to S$3.4m.
Gross profit margin below traditional mark
For the first time since quarterly results were published by the Group, gross profit (GP) margin fell to its lowest point of 52.3%. Historically, GP margins had been hovering in the mid-54% range even in periods of rising cost pressures on raw material prices as the Group had been able to exercise effective procurement procedures i.e. bulk purchases and centralized sourcing. At this juncture, we deem that a turning point has potentially emerged given the ultimate limitations on cost savings centralized sourcing and bulk purchasing can bring.
Earnings estimates lowered
With the regulatory changes for labour hurting BTG more than expected and inherent difficulties in hiring service staff, BTG will likely see staff costs rising from its continued expansion. Furthermore, rental rates could be pushed higher with tight occupancy rates in retail malls. Therefore, we lower our FY13 operating and net profit to S$17.6m and S$10.3m respectively.
Expensive at this point
As we roll forward our 11x peg to the next four quarters, our fair value estimate falls to S$0.49 from S$0.51 previously. Since our last report issued on 13 Aug 2012, BTG has appreciated by 7.1%. In our view, BTG’s valuation at this juncture is rich given the likelihood of depressed margins and the absence of a generous dividend. We urge investors to take the opportunity to lock in profits at current levels, and re-enter when the price moderates lower. Downgrade to SELL.
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