BREADTALK GROUP (BREAD.SP)：WHY THIS BREAD WON’T TALK

January 27, 2014 Initiation COMPANYRESEARCH | SEE PAGE 27 FOR IMPORTANTDISCLOSURES AND ANALYST CERTIFICATIONS Co. Reg No: 198700034E MICA (P) : 099/03/2012 Breadtalk Group (BREAD SP) Why this bread won’t talk  Initiate BUY on this under-researched company with a TP of SGD1.40, implying 50% upside. BreadTalk is by far the most successful Singapore F&B company, boasting a solid regional presence for its homemade brands via more than 800 outlets across 15 countries. Its target for 2014 is to raise store count to 1,000.  Operational statistics are healthy with EBITDA growing rapidly. This should allay fears on BreadTalk’s lacklustre profit growth, hitherto blamed on poor management or a flawed business model though our analysis shows it is a matter of accounting. Going forward, higher-margin businesses should also help lift earnings.  Thailand-based Minor International’s 11% stake may be a prelude to a takeover offer in the next 12-24 months. If so, this would be a bonus for investors. China presence an attractive trait Minor International (MINT TB, BUY, TP 24.30THB) has accumulated an 11% stake in BreadTalk Group since Aug 2013. The Thai hospitality and F&B group is noted for its history of acquisitions but reputation aside, we think its portfolio complements that of BreadTalk’s. We believe BreadTalk’s presence in China –more than 300 outlets in 48 cities – is definitely a key attraction. Value emerging, act before it’s too late We see value emerging. Our TP of SGD1.40 is based on 7X FY14E EV/EBITDA, which is only half of regional peers’ average. We expect BreadTalk’s net profit to grow at 26% CAGR over the next three years as expansion efforts start to bear fruit. Using a SOTP approach to cross-check the replacement value of the firm, we coincidentally arrive at a conservative net value of SGD1.40 per share (SGD403m). Initiate with BUY. Key Data Share Price Performance Maybank vs Market Share Price: SGD0.94 MCap (USD): 206M Singapore Target Price: SGD1.40(+50%) ADTV (USD): 0.1M Consumer Staples(New)BUY52w high/low (SGD)Free float (%)Issued shares (m)Market capitalizationMajor shareholders:-QUEK MENG TONG34%-LEE LIH LENG19%-Minor International PCL11%1.17/0.7428235.4SGD263.6M2,7002,9003,1003,3003,5003,7003,9004,1000.400.500.600.700.800.901.001.10Oct-11Apr-12Oct-12Apr-13Oct-13Breadtalk Group (L)Straits Times Index (R)1 Mth3 Mth12 MthAbsolute(%)2.22.227.2Relative to country (%)3.96.934.3PositiveNeutralNegativeMarket RecsnananaMaybankConsensus% +/-Target Price (SGD)1.40nana2013 PATMI(SGDm)12nana2014 PATMI(SGDm)16nanaSource: FactSet; MaybankJames Koh(65) 6432 1431 jameskoh@maybank-ke.com.sgJuliana Cai(65) 6432 1417julianacai@maybank-ke.com.sgFYE Dec (SGD m) FY12A FY13A FY14E FY15E FY16E Revenue 447.3 532.7 629.8 731.4 860.6 EBITDA 49.6 60.6 70.4 79.6 91.0 Core net profit 12.0 12.5 15.6 19.1 25.1 Core FD EPS (cts) 4.3 4.4 5.5 6.8 8.9 Core FD EPS growth(%) 3.6 3.8 25.3 22.5 31.1 Net DPS (cts) 1.3 1.4 1.7 2.0 2.6 Core FD P/E (x) 22.0 21.2 16.9 13.8 10.5 P/BV (x) 3.2 2.9 2.6 2.3 2.0 Net dividend yield (%) 1.4 1.5 1.8 2.2 2.8 ROAE (%) 13.6 13.0 14.5 15.7 18.0 ROAA (%) 3.9 3.2 3.5 4.2 5.3 EV/EBITDA (x) 4.7 5.5 4.7 3.9 3.0 Net debt/equity (%) 39.0 76.3 53.9 26.7 net cash January 27, 2014 2 Breadtalk Group Jan-13Mar-13May-1 3Jul-13Sep-13N ov-1 3Jan-140.60.70.80.91.01.11.21.3Mi nor Int l took i ni ti al 5.9%Up s take to 6.3%Up stake to 8.9%Up stake to 10. 0%Up stake to 11. 0%Breadtalk Group Limited0. 91 0. 00 0. 00% 11: 05: 15 A M V W A P : 0. 90H igh: 1. 20 Low: 0. 67 Chg: 31. 62%Investment summary Bread and creativity BreadTalk Group is a Singapore-based food and beverage (F&B) company founded by current chairman George Quek in 2000. From first popularising the artisan bread retail concept, the company has seen its footprint in the region growing rapidly. Mr Quek’s initial target of “opening 10 BreadTalk outlets in three years” is a far cry from the 800 retail stores in 15 countries the company now has under its umbrella. Throughout this time, we believe it has stayed true to its commitment to brand building and creativity. Enviable regional footprint BreadTalk has a presence across 15 countries in the Asia Pacific and the Middle East through a variety of formats and brands. Most notably in China, where the retail environment is notoriously difficult, it has more than 300 outlets in 48 cities. We believe it has also been able to make inroads into ASEAN over the last 12 months, making its regional footprint truly enviable. More impressively, much of the footprint is secured through BreadTalk’s own internally created brands, which are typically unique concepts. This gives the company better control over its own branding.