Maintain BUY
Current Price: S$0.47
Fair Value: S$0.66
Sell-off overdone. Since our last report issued on 15 Aug, BreadTalk's share price has fallen 13.8%, exceeding the decline of the Straits Times Index, which has fallen 11.9% over the same period. Although the drop in share price is not surprising given the current state of global economic concerns, with BreadTalk's positioning as a provider of relatively stable consumer products i.e. bread, food court operations, we deem the sell-off to be somewhat overdone at this point, especially with retail sales figures pointing to increased spending and BreadTalk's historically stronger 2H performance.
Restaurant spending up over the past five months. According to the latest July retail sales released by the Singapore Statistics Department, F&B service providers saw an overall increase in sales of 1.6% MoM as restaurants and food caterers saw increased takings for July of 3.3% and 1.9% MoM, respectively. As a group, the F&B service providers have experienced sales growth for five consecutive months.
Historical pickup in 3Q11 performance to continue. Historically, BreadTalk tends to exhibit the highest QoQ revenue growth in 3Q as compared to the other quarters (+14.4% FY08; +12.5% FY09; +14.1% FY10). From our communications with management, this trend is likely to continue. Based on our projections, the Bakery segment should remain the main revenue contributor at around 46% while the restaurant and food court operations should record QoQ revenue improvements as well. Although the restaurant segment operating profits could potentially remain depressed due to initial start-up costs incurred by the commencement of Bangkok's first Din Tai Fung restaurant, early reports on Bangkok's DTF have been encouraging (e.g. peak period wait time of 40 minutes). In terms of its costs, with recent declines in raw material prices, we expect gross profit margins to show slight improvements and surprise on the upside of our forecast range of 54-56%.
Share buybacks could provide some interim support. In the interim, management has initiated some share buybacks of about 853K shares since end Jun. At current share prices, we do expect management to remain active in this area.
Maintain BUY. We leave our 2H11 projections unchanged, and based on its healthy fundamentals, we believe the group can weather the current global slowdown, as seen in its topline growth in the previous downturn in 2009. We are maintaining our BUY rating with an unchanged fair value estimate of S$0.66.
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