BreadTalk shareholder sold the counter

Background: Founded in 2000, BreadTalk has become a distinguished F&B brand regionally, with bakeries, restaurants, and food atriums at its helm. The group owns a selection of brands including BreadTalk, Toast Box, Food Republic, RamenPlay, and The Icing Room. It also manages franchises of Taiwan’s Din Tai Fung and USA’s Carl’s Jr. To date, the group owns over 500 outlets in 16 countries, supported by a fleet of over 6,000 employees.

Why are we highlighting this stock?
BreadTalk’s share price has corrected since our last update in Nov 2011. Prior to its ex-dividend date, Keywise Capital, a shareholder since 2007, sold the counter, thus lowering its shareholding from 10.79% as of FY11 to below 5%.

Our View
Breakneck speed of expansion slowing. In the past, BreadTalk always associated to be a growth play story, and had made it clear to investors that topline growth was its priority, at the heavy expense of earnings growth. However, it appears the group has not only slowed down the number of store openings, but are relying more on franchised outlets to lower its CAPEX. A closer look into its latest quarterly earnings also reveals an improvement in gross and EBIT margins year-on-year.

Though operating costs remain a pressing issue. The group opened another 25 outlets this quarter. 1Q12 revenue rose by 27.4% YoY to SGD106.1m, while net earnings grew by 10% to SGD1.1m, implying a net margin of 1%, down from 1.2%. This is simply a seasonality issue as evident from historical data. Operating costs in rental, wages, and food items, however, remain a problem in North Asia and Singapore. Administrative and selling costs currently account for 54.2% of the Group’s revenue.

Still, valuations are undemanding and balance sheet is strong. Valuations are relatively undemanding at 11.2x historical PER and 1.9x NAV. The group’s cash flow remains good, with stable inventory and receivables turnovers, along with improving cash conversion cycles. Keywise’s exit has also lifted a long share overhang. The stock is currently at its 52-week low, and we would give a higher rating if the group can improve on its cost containment.