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BreadTalk: Valuable But Expensive At Current Price
Corporate Digest | 11 April 2014
By: Louis Kent Lee
Articles (199) Profile

It’s innovative, and it knows how to capture our demanding palate.

That’s right, BreadTalk was the first that changed the bakery landscape in Singapore with its signature Pork Floss Bun.

Since inception till today, it has become a well-known brand with a wide reach of bakery outlets.

However, we need to be clear that BreadTalk is more than just its bakery products, as it also owns Food Courts (eg Food Republic) and restaurants (eg Din Tai Fung, Ramen Play).

An all too common sight: The long queue outside Din Tai Fung

Over the past few years, you’d have noticed that BreadTalk’s presence have seemingly increased.

Presence Boosted By Sustainable Expansion

In fact, it is hard not to see any of such outlets in major shopping malls in Singapore, and that is because they’ve been expanding strategically.

The charts below show the expansion strategy panning out well.

Source: Annual Reports (BreadTalk Group)

Growth in outlets also saw very good growth in corresponding revenues, reflecting good brand acceptance from consumers.

Source: Annual Reports (BreadTalk Group)

CAGR growth from FY10-FY13 in terms of revenue for the respective revenue drivers also saw strong double digits growth, which nullifies a brand fatigue scenario.

Revenue CAGR of listed segments from FY10-FY13

Ploughing through the numbers and business model of BreadTalk, the following are its respective investment merits and risks.

    Investment Merits

  • Consistent high ROE Performance (double digits) for the past four years
  • High and consistent gross profit margins of more than 50 percent
  • Good portfolio of brands and strong market presence in Singapore
  • Good footprints across 15 countries
  • Strong value chain that helps keep a lid on fluctuating raw material costs
  • Innovative products that prevents brand fatigue
  • Net operational cash flow consistently higher than net profit, stemming superior operational cash flow strength
  • Acceptance of its bakery products in China puts BreadTalk in a good position to increase its inroads in the motherland

    Investment Risks

  • High gearing as a result of aggressive expansion (net debt/equity 0.948X)
  • Single digit net profit margin
  • High staff costs, distribution and selling expenses threaten to eat further into the already low profit position
  • Singapore’s bakery industry is a mature market
  • Expansion costs continue to be a drag on eventual profit position
  • Copy cats in China (e.g. BreadTop, an almost identical BreadTalk bakery from top to toe)
  • Change in government’s policy on wage issues will directly impact BreadTalk’s staff costs’ component

SI Research Takeaway

Competitive moats seen in its numbers, and the strength of its presence in Singapore are key things that make BreadTalk valuable.

China will be its main fuel to help it reach $1 billion in revenue in the next three years.

The nation with a huge population and favourable palates for artisan bakery products will largely be a catalyst to help spur such growth momentum, creating further inroads for BreadTalk in China.

It is a good thing that BreadTalk has chosen to seek growth in other geographic regions, as Singapore’s market is already matured and reaching saturation (Especially for Bakery products).

However, all expansion comes with a cost, and this cost has largely been a drag on BreadTalk’s liquidity and profit position for a while now.

Significant non cash depreciation and amortisation has constantly been pummelling the already low net profit position.

This, coupling with added elements of labour costs, due to diffculties in retaining labour, shortage of manpower resulting in downtime, and also higher wage levies imposed by the government remains a threat to its bottom line.

Nonetheless, its strong value chain and operational prowess has helped it maintain its high gross profit and consistent ROEs, and this consistency is largely applauded.

Maybe the stock is a tad bit expensive for the time being, but once it adjusts, I’m getting some pork floss buns for my portfolio.

Louis is a qualified accountant with the ACCA, and is the Research Editor at Shares Investment magazine.

Please click here for more information about this author.

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