In our daily lives, food plays an important role in providing the necessary nutrients for our body to function throughout the day. Arguably, breakfast has been considered the most important meal of the day by many since it kickstarts our metabolism and provides us with sustenance. Bread is considered the preferred breakfast item in Singapore mainly attributable to the convenience of purchasing the bread from local bakery which requires no preparation time for the consumer, which is very much influenced by the hectic lifestyle faced by many Singaporeans.

We take a look at Singaporeans’ dining habits and found out that 60 percent of Singaporeans dine out at least four times a week according to Health Promotion Board’s 2010 survey findings. Coupled with a MasterCard survey done in 2013, Singaporeans spent an average of $248 a month on dining, 41.7 percent higher than Asia Pacific average of $175. This is very encouraging for the F&B industry that benefits from consumers’ dining out habits which potentially leads to higher revenue growth.

The Business

BreadTalk Group (BreadTalk) was first founded by Dr George Quek Meng Tong in July 2000. It opened its very first bakery outlet at Bugis Junction in Singapore and received widespread media attention which led to more than 1000 international franchise enquiries for BreadTalk in the following year. In 2003, BreadTalk was listed on the Singapore Exchange and launched their first overseas outlet in both Indonesia and China. The years that followed brought about rapid expansion for BreadTalk and further diversification of its portfolio into other revenue streams such as Restaurant, Food Atrium and 4orth.

Indeed, the Singapore food consumer market has always presented opportunities for BreadTalk to benefit from and has since expanded to become one of Singapore’s largest Food & Beverage (F&B) group with over 50 percent of its revenue arising from the bakery segment, as well as over 950 F&B outlets spanning over the globe in 17 territories, mainly from the Asia Pacific and Middle East region.

BreadTalk’s core revenue segment now offers much more than standard bread offerings at BreadTalk outlets back in the past. They now include European-inspired artisanal creations from Bread Society signature, Nanyang coffee from Toast Box and even traditional pastries offered by Thye Moh Chan, a traditional Teochew baked goods household name.

Aggressive Expansion

DTF

Aggressive expansionary tactics employed by BreadTalk has led to the introduction of widely acclaimed Din Tai Fung, a Michelin star awarded restaurant from Taiwan specialising in steamed dumplings (xiaolongbao) that was once ranked one of the World’s Top Ten Best Restaurants by The New York Times.  Europeans will finally get a taste of Din Tai Fung as its maiden restaurant that is scheduled to open in London by the end of 2018.

Under its newly-formed business division, 4orth, a recent joint venture has been inked with Song Fa Holdings to introduce its highly-raved Teochew Bak Kut Teh that was awarded Michelin Bib Gourmand to China and Thailand. Following the successful launch of Song Fa Bak Kut Teh restaurant on 26 January 2018 in Shanghai, there are now plans in place to expand the brand further into major cities such as Beijing, Shenzhen and Guangzhou.  BreadTalk intends to further expand through the formation of strategic partnerships with reputable organisations to continue its leadership in the F&B industry across Asia and possibly worldwide soon.

The underperformance of bakery outlets in Hong Kong and China led to closure of 30 outlets to 384 outlets for FY17 while rest of the world (excluding Singapore) increased by 46 outlets to 367 outlets, in view of better margins by other geographical segments. Earnings before Interest, Taxes, Depreciation and Amortisation (EBITDA) margin for bakery segment was dragged down by 1.7 percent to 7.8 percent. This potentially contributes to higher capital expenditure and lesser earnings for the periods to come. Hence, expansion will only equate to higher earnings if margins remains in a healthy position.

Strong Investment Properties

BreadTalk had previously invested in several investment properties, considering that it may receive the first right of refusal to key retail locations. The valuation of its current holdings namely, AXA Tower, Chijmes, Beijing Tongzhou District Phase 1 and Beijing Tongzhou District Phase 2 are said to worth up to $143 million based on independent valuations and estimations by RHB Invest. This equates to approximately 27 percent of its current market capitalisation of $535.6 million as of 2 April 2018.

In recent divestments, BreadTalk realised an $8.8 million net capital gain in the divestment of 112 Katong in 2016 and paid out 45 percent as special dividends. Following that, BreadTalk realised another $9.3 million net capital gain in the divestment of Tripleone Somerset in 2017 and 60 percent was paid out as special dividends this time. Given that the trend will continue, BreadTalk’s 5.3 percent equity stake in AXA Tower, is most likely the next divestment target since Perennial Real Estate Holdings recently led its consortium of investors to consider the en bloc sale of AXA tower at no less than $1.65 billion on 1 August 2017.

Financial Performance

BreadTalk registered a spectacular financial performance for FY17; its core F&B business net profit jumped by 153.3 percent to $17.7 million after excluding one-off items. It also declared a full year dividend of seven cents that translates to a 90.2 percent dividend payout ratio which is relatively high and appeals towards investors looking for a dividend play.

Valuations

As of 2 April 2018, BreadTalk’s share price is trading at $1.90. In terms of price-to-earnings (P/E) ratio, BreadTalk is trading at 24.5 times, well below its average regional peers of 38.6 times which is considered to be relatively undervalued to some and may seem very attractive for some investors. Concurrently, for price-to-book (P/B) ratio, BreadTalk is trading at 4.1 times, well above its average regional peers of 3.2 times which can be considered as relatively overvalued to some and investors may decide to sit out on this.

Valuations Chart