BreadTalk Group

OCBC on 14 May 2012

BreadTalk Group’s (BTG) reported slight improvements in its 1Q12 results that were well within our expectations. Revenue grew 27.4% YoY (+5.6% QoQ) to S$106.1m on the back of stronger sales in China’s bakery division, and gross profit margin improved by 0.5 percentage points YoY (-0.5 ppt QoQ) to 54.3%. Net profit climbed 15.1% YoY to S$1.4m – although it fell 64.3% QoQ on seasonality factors (4Q is typically the strongest quarter) – following higher contributions from the Bakery and Restaurant segments. Going forward, we expect BTG’s revenue growth to persist as the growth in Asia maintains its upward push. While operating margin may remain depressed, as is typical of a company undergoing an expansion phase, we retain our confidence in management’s ability in controlling costs and highlight the general stability in gross profit margins over the years. With BTG’s results in-line with our expectations, we keep our FY12 projections unchanged and reaffirm our HOLD rating with an unchanged fair value estimate of S$0.57.

Slight improvement in 1Q
BreadTalk Group (BTG) reported slight improvements in its 1Q12 results as revenue grew 27.4% YoY (+5.6% QoQ) to S$106.1m on the back of stronger sales in China’s bakery division while gross profit margins improved by 0.5 percentage points YoY (-0.5 ppt QoQ) to 54.3%. In terms of its operating profit margins, BTG performed slightly better (2.4% vs. 1Q11: 2.3%) as higher contributions from the Bakery and Restaurant segments – boosted by China sales and Din Tai Fung (DTF) operations respectively – helped to offset weaker results from the Food court division, which was dragged lower by the Chinese and Singaporean locations. As a result, 1Q12 net profit climbed 15.1% YoY to S$1.4m although it fell -64.3% QoQ on seasonality factors (4Q is typically the strongest quarter). BTG’s top and bottom-line came in at 25.4% and 10.7% respectively, falling well within our expectations.

Improving outlook but rising costs exists
With growth in Asia remaining the bright spark of the global economy, BTG’s revenue growth should persist over the next three quarters as consumer demand continues picking up. As of 1Q12, the number of its outlets has grown 19.9% YoY (+3.7% QoQ) to 554. While it faces rising cost pressures – especially as it maintains its expansion phase – we believe that the development of additional revenue streams via a greater network of stores and brand offerings will minimize the negative impacts. In addition, BTG should start to see some trickle down benefits from cost rationalization and economies of scale and scope.

Maintain HOLD
While operating margins may seem depressed, it is typical of a company undergoing an expansion phase. However, we retain our confidence in management’s ability in controlling costs and highlight the general stability in gross profit margins, which indicates that BTG’s management is effective in their cost control initiatives i.e. inventory control, purchasing ability etc. With BTG’s results in-line with our expectations, we keep our FY12 projections unchanged and reaffirm our HOLD rating with an unchanged fair value estimate of S$0.57.