Friday, 14 March 2014

BreadTalk Group

Kim Eng on 12 Mar 2014

  • BreadTalk to focus on China as it continues on its strong growth trajectory after ending FY13 with revenue/net profit (+20%/+13% YoY) at record highs. Reiterate BUY. 
  • Management targets to double revenue to SGD1b by FY16E (+23.1% CAGR). Increasing the margins is the priority.
  • The stock remains undervalued. Our SOTP approach to cross-check the replacement value of the firm yields a conservative figure of SGD1.50 per share.
Focused on growth
China will be a key pillar in BreadTalk’s growth plan going forward, according to management. The company is eyeing further penetration of its bakery business in Tier 2 and 3 cities, where a large captive market beckons. Last year, it opened a record of nine food courts in China (33 as at end-2013) and we expect that pace to continue. With Din Tai Fung restaurants thriving in both Singapore and Thailand, it is possible that BreadTalk may be able to secure master franchises in new markets.

Singapore remains a cash cow with healthy margins despite rising labour costs. We believe overall margin enhancements would come from higher scale, especially in China, as well as the increase in franchisee revenue.

What’s Our View
We expect BreadTalk to see EPS grow at a CAGR of 23% over FY14E-16E, driven by top-line growth (+18.1% CAGR) and EBIT margin improvement of 0.1-0.3ppt over FY14E-FY16E (2013: 4.3%). We therefore raise our FY14E-16E earnings by 1.6-4.7% and our TP increases from SGD1.40 to SGD1.54, still pegged to 7x FY14E EV/EBITDA. In our view, the stock remains significantly undervalued, considering our SOTP approach to cross-check yields a conservative value of SGD1.50 per share. Reiterate BUY.

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