On 2 September 2019, BreadTalk announced its acquisition of Food Junction for $80 million to become the third largest food court or coffeeshop player in Singapore with 26 outlets, behind NTUC Foodfare/Kopitiam (10+52 outlets) and Koufu (47 outlets).

Currently, Food Junction has 12 food courts in Singapore and three in Malaysia, with an additional one expected to open in 2020 at The Mall, Mid Valley Southkey. Unlike BreadTalk’s Food Republic which targets the premium segment, Food Junction has more of a mass-market appeal with a 10 to 15 percent lower average ticket size. As such, management believes that the location of Food Junction food courts would fit into the existing portfolio of BreadTalk which will allow the group to cater to a different market segment and expand into non-traditional shopping malls.

Financial-wise, Food Junction incurred a net loss of $1.7 million in FY18 and only recorded a net profit of $3,183 in 1H19. As at 30 June 2019, Food Junction had a net asset value of $12 million.

Food Junction To Drag On Earnings

BreadTalk will finance the acquisition with a loan of $49.6 million and $30.4 million cash. With the additional debt of $49.6 million, this would raise the group’s net gearing and there will also be additional interest costs. In the short term, we could anticipate a drag on margins and earnings on BreadTalk. Once Food Junction returns to profitability, its contribution to BreadTalk will be positive.

On a positive note, although earnings are not accretive, the acquisition will allow BreadTalk to strengthen its market share and store network in the food court segment to better compete with the top two players. In addition, the acquisition also allows BreadTalk to reap additional income stream and benefit from potential synergies from sharing of resources. Note that a food court is a high fixed-cost business. Once revenue exceeds those fixed costs, there is a high-margin potential.

Expensive Valuation

Share Price P/E Dividend Yield
Koufu 0.77 15.89 1.32%
BreadTalk 0.65 26.11 1.56%

(Source: Bloomberg)

The market has been rather optimistic about BreadTalk’s potential post-acquisition. In terms of price-to-earnings (P/E) ratio, however, 26.1 times look steep unless Food Junction can help to bring down the valuation. But this will not materialize in the short term.

That said, we are feeling neutral on the acquisition deal as the cost synergies will be outweighed by interest cost. Food Junction may be profitable only in 2H20 as the new management team will aim to improve Food Junction’s average ticket size and table turns. Investors should only expect to be decently rewarded in the longer term.

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