Tuesday 9 April 2013

Breadtalk

OCBC on 8 Apr 2013

The 12% correction in BreadTalk’s share price over the past two days has helped to temper the sudden spike from late-Mar, and we take this opportunity to caution investors against getting too carried away. In our view, a takeover by Minor International is remote at this juncture. Despite impressive yearly double-digit revenue growth, BreadTalk has yet to translate the success to its operating margins. Although its ongoing expansion plans are partly to blame, the pace of the margin declines does create some concerns over its operational efficiencies in the long-run. In addition, with FY13 PATMI and dividend growth unlikely to differ much from recent performances, we deem BreadTalk expensive at current price levels. Keeping our fair value estimate of S$0.77, we downgrade BreadTalk to SELL and urge investors to take profit.

Timely price correction to halt over-exuberance 
The 12% correction in BreadTalk’s share price over the past two days has helped to temper the sudden spike from late-Mar. As a recap, Minor International (MINT), a Thailand-headquartered hospitality business, increased its stake in BreadTalk to 10% recently, and this fueled speculation of a possible take-over by MINT. According to management, these recent share purchases by MINT have been unsolicited.

Takeover unlikely at this juncture 
In our view, a takeover at this juncture is an unlikely scenario. Firstly, BreadTalk's chairman, George Quek, holds about 53% of the company along with his wife, and this is a stumbling block for any general offer. In addition, BreadTalk is far from being a polished product so any acquisition will encompass significant risks. For instance, its operating margins have narrowed due to ongoing expansion but the pace of their declines has led to some concerns over future margin stability when BreadTalk does approach a steady state. 

Higher probability of GO when BreadTalk achieves its targets
From our review of its operations, BreadTalk is still at least five years away from its stated goals. Its management also 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 valution. 

Unchanged fundamentals, time to take profit
We keep our S$0.77 fair value and downgrade Breadtalk to SELL as the share price has run ahead of fundamentals, which have remained unchanged. Margin improvement is unlikely in FY13, together with any increase in dividend payout. In fact, the forecasted yield is an unattractive 1.3% at current price levels.

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