Broker's take: RHB revises call on BreadTalk to 'neutral' on weaker than expected Q1 results

BROKER RHB has revised its rating on BreadTalk Group to "neutral" from "take profit", with a target price of S$1.86, or a 2 per cent upside from its closing price of S$1.83 on Thursday, the date on which its Q1 financial results were released. 

As at 10.07am on Friday, the counter was trading at S$1.73 apiece, down 5.5 per cent or 10 Singapore cents.  

RHB analyst Juliana Cai noted that the group's Q1 results came in below expectations, with weaker than expected performance from its bakery and food atrium segments denting growth from the restaurant division. 

BreadTalk Group's first-quarter net profit plunged 89.1 per cent to S$10.8 million from the previous year, the group said in an exchange filing on Thursday evening after market close. Earnings per share for the quarter fell to 0.42 Singapore cent from 3.84 Singapore cents a year ago. 

Excluding real estate earnings and headquarter costs, core F&B Ebitda (earnings before interest, taxes, depreciation and amortisation) declined marginally year-on-year, RHB said. 

The broker added that Ebitda at BreadTalk Group's bakery division fell sharply by 31 per cent, on the back of lower revenue and operating leverage. This decline in revenue was mainly attributed to the consolidation of its China franchisees, which saw the number of outlets in China reduced by 24 from the first quarter last year. 

While the group's food atrium operations continue to experience strong same store sales growth, overall Ebitda margin was dragged down by the closure of its Hangzhou outlet. 

"We cut our FY18-20 forecasts by 4 to 7 per cent to reflect lower-than-expected margins in the bakery and food atrium divisions in Q1 2018. Nonetheless, we understand that the group has plans to expand its bakery franchisee network, and we expect earnings from the bakery segment to pick up over the next three quarters," RHB noted. 

"We also expect lower margin at the restaurant division when the UK Din Tai Fung opens in Q4 2018."

Despite some startup costs incurred for the UK Din Tai Fung, revenue for the group's restaurant division grew by 6.2 per cent while Ebitda rose 24 per cent from Q1 2017 with the addition of three new outlets - one in Singapore and two in Thailand.

"While we expect the next three quarters to chart seasonally stronger results, we remain concerned over the group’s near-term earnings volatility as a result of potential startup costs for new investments," RHB said. 

It added that key catalysts for the stock include the sale of BreadTalk Group's stake in AXA tower or Chijmes, which would likely lead to special dividends.

Without the sale of its investment properties, RHB expects ordinary dividends for the group to maintain at four Singapore cents per share.