BreadTalk Group

OCBC on 1 Aug 2012

Despite the difficult operating environment during the second quarter of the year, we remain hopeful for a stable QoQ showing in BreadTalk Group’s (BTG) 2Q12 results, which are due to be released on 10 August. While F&B retail sales in Singapore have declined on a MoM basis, we do not anticipate a significant revenue drop-off due to BTG’s strong bakery brand equity and popular Din Tai Fung (DTF) restaurant chain. Furthermore, BTG’s operations in China and Thailand will provide additional support through strong sales in its bakery and Bangkok DTF respectively. Going forward, the environment remains challenging as costs of raw materials such as wheat and corn have touched 17 month highs on supply concerns. While we retain our confidence in management’s ability to control costs, we adjusted our FY12 costs of sales projections slightly to incorporate the likelihood of a sustained elevation in raw material costs for the year. This adjustment sheds a cent off our fair value estimate to S$0.56. Reaffirm our HOLD rating ahead of BTG’s 2Q12 earnings announcement.

2Q12 earnings preview
Despite the difficult operating environment during the second quarter of the year, we remain hopeful for a stable QoQ showing in BreadTalk Group’s (BTG) 2Q12 results, which are due to be released on 10 August. With around half of its revenue coming from Singapore – where F&B retail sales have declined on a MoM basis over the past three months – there would undoubtedly be some negative impact on its bakery and restaurant segments as consumers tightened up their purse strings. However, we do not anticipate a significant revenue drop-off from the previous quarter as BTG’s strong bakery brand equity and popular Din Tai Fung (DTF) restaurant chain will allow it to maintain its share of the market. Furthermore, we expect BTG’s operations in China and Thailand to provide additional support through strong sales in its bakery and Bangkok DTF respectively.

Rising raw material costs a lagged effect
30% of BTG’s cost of sales is attributed to raw materials such as vegetable oil, wheat, flour, corn etc, and the prices of some of these products have spiked sharply since the middle of Jun. Supplies of corn and wheat have been threatened by a severe drought in the United States and a heatwave across southern Europe, and that has led to a flurry of investment activity pushing prices to near 17 month highs. As BTG purchase its raw materials a few months out at a time, there will be a laggard effect before the higher costs hits its books.

Maintain HOLD
While 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, we adjusted our FY12 costs of sales projections slightly to incorporate the likelihood of a sustained elevation in raw material costs for the year. This adjustment sheds a cent off our fair value estimate to S$0.56. Reaffirm our HOLD rating ahead of BTG’s 2Q12 earnings announcement.