BreadTalk Group - A tale of 2 halves

■ 3Q15 results mixed: restaurants did well, bakery and food court soft

■ Rationalisation of underperforming stores to improve profitability

Downgrading to Outperform [2]; trimming our TP to SGD1.29

What's new:
BreadTalk’s results for 3Q15 were a tale of 2 halves: restaurants performed well, but the bakery and food court side came up short. Net net, we revise down our 2015-16E EPS forecasts, and our rating goes to Outperform (2) from Buy (1).

What's the impact:
The restaurant segment’s revenue grew 11.8% YoY, 4.1% above our forecast, while the EBITDA margin expanded 4.4pp to 21.4%. Management noted this was driven by positive SSSG for Din Tai Fung in Singapore (~7%) and Thailand (10-12%), and better cost control. As the company aims to close 4 underperforming Ramen Play stores in 4Q15, we think the EBITDA margin growth outlook is stronger than expected.

Revenue for the bakery and food court segments was up 2.7% YoY, though 4.1% below our forecast. Management shared that recent negative newspaper headlines, which we expect to be a one-off event, dampened sales at its bakery outlets in Singapore and China for about a month, while the Malaysia and Hong Kong outlets underperformed. The food court segment faced weak footfall in China, leading to a longer time to fill its vacant stores. BreadTalk can tolerate up to 5% of vacancies for its food courts; for certain outlets in China, vacancy rates exceeded 10% as of end-3Q15. In addition, a higher-than-expected tax rate (3Q15A: 44%, 3Q15E: 30%) during the quarter led to a 60% YoY decline in net profit to SGD1.6m (3Q15E: SGD3.5m).

After speaking with management, we believe it will focus its strategy on improving existing stores, and less on store expansion, in light of the challenging operating environment for the food court and bakery segments. In our opinion, this should lead to an improvement in the underperforming bakery and food court business.

Technical Analysis
Daily Chart
What we recommend:
Given the strong outlook for the restaurant business, we are raising our sales per outlet for the segment by 3.5-13.7% for 2015-17E, mitigating a 1-2% cut in our food court and bakery sales per outlet forecast given the recent underperformance. Accordingly, our 2016E EPS forecast is pared by 2%. Factoring in the 9M15 results and our revised-down sales per outlet for the direct-owned bakery and food courts, we cut 2015E EPS by 16.4%. Given limited upside to our TP of SGD1.29 (previously SGD1.31), based on a 2016E PER of 19.6x, we revise down our rating to Outperform [2] from Buy [1]. Risk to our call: food safety scandals.

How we differ:
Our revised 2016E EPS is 4.8% above the Bloomberg consensus, as we expect stronger EBITDA margin expansion, driven by rationalisation of the restaurants. (Read Report)

Read Related Reports
1) BreadTalk Group - Earnings strain continues from Bakery and Food Atrium‏ by OCBC Investment Research, published on 11 November 2015

2) BreadTalk Group - Dragged down by China operations by RHB Research, published on 11 November 2015

Source : Daiwa Capital Markets

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