February 10, 2012

BreadTalk

OCBC on 10 Feb 2012

Historically, BreadTalk Group’s (BTG) strongest quarter in terms of revenue contribution is its 4Q, and we expect this trend to continue unabated with a projected 7% QoQ growth in 4Q11 revenue to S$102m. On the cost front, with recent declines in raw material prices and a slowdown in inflationary pressures, we expect gross profit margin to hold steady around 54%. However, in terms of its share price, we expect further consolidation around its current price level pending the release of FY11 results. Furthermore, despite largely positive macro-economic developments, doubts over the sustainability of a market rally still linger and the threat of a strong correction still prevails. As small-cap stocks like BTG react more severely to negative events, we adopt a cautious approach and maintain our HOLD rating albeit with an higher fair value estimate of S$0.54 (previously S$0.52) after rolling forward our valuation to 12x FY12F EPS.

4Q traditionally the strongest quarter. Historically, BreadTalk Group’s (BTG) strongest quarter in terms of revenue contribution is its 4Q (30.5% FY08; 27.7% FY09; 27.9% FY10). Due in part to seasonality factors – increases in consumer spending over the year-end holiday period – we expect this trend to continue unabated and anticipate a 7% QoQ growth in 4Q11 revenue to S$102m. Based on our projections, this increase will be driven by the Bakery segment, which should remain the main revenue contributor at around 47%. In terms of its other segments, we are hopeful that its restaurant operations will post double-digit QoQ growth following the expansion of its Din Tai Fung franchise into Thailand as well as a strong showing in its Singapore locations. In terms of its costs, with declines in raw material prices and slowdown in inflationary pressures, we expect gross profit margin to hold steady around 54%. BTG is expected to release its 4Q and FY11 results on 24 Feb.

Price run-up correlated with broad market. Given its inclination to follow broad market movements (one-year correlation with STI: 88%), which have rallied on improving investor sentiment, BTG has appreciated 7.4% on a year-to-date (YTD) basis. However, since the start of Feb, its share price has started to stabilize and consolidate around its current price level of S$0.58 despite relatively higher trading volume. While its 4Q11 prospects are encouraging, we deem that any further upside will be limited pending the release of its FY11 results and FY12 management outlook.

Maintain HOLD. Despite largely positive macro-economic developments, doubts over the sustainability of a market rally still linger and the threat of a strong correction still prevails. As small-cap stocks like BTG react more severely to negative events, we adopt a cautious approach and maintain our HOLD rating albeit with an higher fair value estimate of S$0.54 (previously S$0.52) after rolling forward our valuation to 12x FY12F EPS.

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