TA wise, I think is on a uptrend mode patterns! Looking good to re-attempt $1.98. Crossing over with ease may rise towards $2.00 to $2.10. Dyodd.
I shall look at BreadTalk recent 7 years growth since it’s recent FY17 financial report presented the past 7 years of it’s performance. First we explore how the total revenues of BreadTalk over the past 7 years have grown. It’s total revenues have grown at a compounded annual growth rate (CAGR) of 10.25% over the past 7 years. This shows that BreadTalk is still a growth company with a double digits compounded growth rate in it’s total revenues. It is not surprising considering how BreadTalk continues to release recent news of various partnerships with different partners be it F&B or non-F&B partners to grow it’s businesses. It is still in the vein of expanding and growing it’s overall business and has not slowed down it’s pace of desiring growth.
Next, we look at how the operating profits have grown. The operating profits have grown at a CAGR of 12.7%. This growth rate is higher than the growth rate of revenues. It showed that BreadTalk has achieved a good operating efficiency by growing it’s operating profits faster than revenues. A few years back, there were news of the profit margins of BreadTalk declining due to challenges faced by it’s businesses. However, in it’s latest FY17, BreadTalk has managed to reduce it’s distribution and selling expenses which were the largest operating expense to them thus resulting in a jump in operating profits y-o-y. If BreadTalk can continue to work on reducing their distribution and selling expense and even their administrative expenses, it will go well in improving their profit margins which have always been the challenge to them to maintain their profit margins even while growing their revenues.
Next, we look at how the net profit margin attributable to shareholders has changed over the past 7 years. The net profit margin 7 years ago was 3.72% and has dipped to lower margin levels below 2% but has recently recovered to 3.64% to match the margin 7 years ago. Hopefully, as BreadTalk management has mentioned before that they must not sacrifice profit margins for it’s expansion and growth. And they can continue to watch their net profit margin closely to strategise and work towards in all the best they can to decide prudently which areas of business interests to expand into and optimise their operations to reach better efficiency, scale of economy and reduce costs and expenses.
Next, we look at the earnings per share (EPS) growth over the past 7 years. EPS has grown at a CAGR of 9.95% over the past 7 years. Again, this reflects a growth company since it is very close to a double digit compounded growth rate.
Next, we look at the earnings per share (EPS) growth over the past 7 years. EPS has grown at a CAGR of 9.95% over the past 7 years. Again, this reflects a growth company since it is very close to a double digit compounded growth rate.
Next, we look at their growth in cashflows. Operating cashflows have grown at a CAGR of 9.2% over the past 7 years. This is in step with their CAGR in revenues though at about a 1% lower rate. If the operating cashflows CAGR growth lags the CAGR growth in revenues too much for a business, this makes one wonder where are all the cash going when the business is growing it’s topline and make sound a red flag because the business is not generating cash from it’s operations even while it registers good growth in revenues. However for BreadTalk, this is not a concern at all. Their CAGR for free cashflows is about 25.8% over the past 7 years. This is a good sign suggesting that BreadTalk is generating owner’s earnings at a high double digit growth rate (which Warren Buffett likes to look to free cashflows as owner’s earnings).
I examined BreadTalk’s past 7 years trend in capital expenditures and found that it has remained relatively stable about same level 7 years ago and now. If their capital expenditures continue to be able to somehow be maintained at similar levels going forward while their operating cashflows keep growing, that would potentially make this F&B group very good at generating owner’s earnings (free cashflows growth). And real cash generated in the form of free cashflows is so wonderful to a business for various uses such as dishing out fatter dividends to shareholders or could be used to reinvest into the growth of the business without taxing too much leverage from borrowings. Quote: jeremyowtaip
BreadTalk’s leverage has gone higher in previous years probably due to taking on leverage to grow it’s overall businesses faster. This has also once been a concern for some investors. However, looking at their free cashflows CAGR which is high, true enough BreadTalk has the cash to reduce it’s once high financial leverage to now a lower leverage. The debt to equity ratio has reduced from 1.38 in 2015 two years plus ago when it was still at it’s highest leverage level to now at 1.14. Based on it’s FY17 balance sheet, BreadTalk generated a free cashflows of $47 million and had $41 million net debt. Thus, there is no liquidity issue for it even while it’s debt to equity ratio is still high.
However, it seems like this group is never resting on it’s fast expansion and growth as it takes on another debt of a $100 million medium term note issued in Jan 18. While it barely has just got comfortable with reducing it’s debt to equity ratio level, it again increases the debt to equity ratio with this recent medium note issued. As long as it’s free cashflows are still fast growing through it’s expansion and growth, I guess there is still no cause for concern on their liquidity. It seems that this group is still setting it’s sight to keep expanding and growing it’s local and especially overseas businesses.
Next, we examine the various business divisions to compare which are the better performing ones. For the bakery division, revenues have grown at CAGR of 8.2% over the past 7 years. The EBITDA margin has fallen from 11% to 7.8% over the 7 years. The number of bakery outlets have expanded from 395 to 871. It seems that even though number of outlets have more than doubled, the EBITDA margins have not been able to be maintained for this division.
For the food atrium division, revenues have grown at CAGR of 6.8% over the past 7 years. The EBITDA margin has dipped down from 16.8% and has since recovered back to 16.8% in FY17. The number of food atrium outlets have grown from 32 to 60 over outlets and then reduced in number to 53 outlets over the past 7 years. The dip in EBITDA margins could be due to some of the food outlets not performing well and thus the group has scaled back and probably stop operating those outlets which were not performing well and thus managed to increase their EBITDA margin back to same level as 7 years ago.
For the restaurant division, revenues have grown at CAGR of 14% over the past 7 years. The EBITDA margin has increased from 9.5% to 21.4% over the past 7 years. The number of restaurant outlets have grown from 10 to 25. This clearly shows us that this restaurant division must be their strongest performing division because CAGR for revenues grew at a rate 14% which is higher than total revenue (all divisions taken together) CAGR rate of 10.25%. Also, the EBITDA margin is the highest among all the divisions.
For the 4orth division, the revenues did not grew but remained at about same level after 7 years. EBITDA margins were negative but have since recovered to positive territory in recent two years. The number of 4orth outlets have reduced from 8 to 5. This division used to own the 5 RamenPlay outlets which have now converted to So Ramen restaurants in Singapore. Hopefully with this conversion and revamp, the new So Ramen restaurants can perform better and improve on their EBITDA margin. Belonging to this division, there is also a partnership with Song Fa Holdings to bring their Bak Kut Teh cuisine to China and Thailand. Hopefully this also pans out well and this division can improve it’s performance going forward.
Overall, I find that BreadTalk being a F&B group operates in a naturally competitive F&B environment where the operating costs and expenses are also keen with generally low single digit net profit margins. They have to strategise and play their game well in the markets they are expanding into. It seems that their restaurant division is the strongest division. Perhaps it may be good to focus resources on expanding this division more? The more they diversify into different markets with more F&B brand offerings and partnerships, the more resilient and better will be their earnings quality going forward.
As usual, in any of their new markets they are entering, they may need some time to adapt to stabilise and then start to grow their operations and earnings. But, with their current size of operations and number of outlets in various divisions, any potential shocks from entry into the new markets should be very manageable. It appears that they can manage their current high debt to equity ratio even while they continue to take on more debts to fund their overseas expansion. This is due to their fast growth in free cashflows favouring their expansion into the various overseas markets.
Valuation wise, on the assumption of BreadTalk continuing to grow their EPS at historical CAGR of 9.95% going forward for next 7 years, using my method of estimation, the fair value of BreadTalk share price is $2.20. BreadTalk last traded (9 Mar) at $1.94 which the market is according a CAGR of 8.27% on it’s EPS going forward. I think that if one is conservative, then current share price is already fair to buy BreadTalk shares at. I will prefer to be conservative to have a lower assumption on it’s CAGR in EPS than historical growth rates to have a margin of safety. If the share price should trade even lower than $1.94, it becomes even more attractive to buy and own the shares of this F&B group which is still fast expanding into overseas locales and also fast growing it’s owner’s earnings (free cashflows) at high CAGR of more than 20%.
PS: BreadTalk has announced they will do a 2 for 1 share split in near future. Thus, all the fair share prices I have mentioned we just need to halve them to look at after the share split.
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