Breadtalk, What’s Happened to You?

breadFood & beverage (F&B) retail outlet operator Breadtalk (SGX: 5DA) recently sent investors’ hearts aflutter after attracting the attention of Thai hospitality, leisure and retail company, Minor International.

Rising Attraction

On 22 March 2013, an announcement was made that Minor International had increased its ownership stake in Breadtalk from 6.3% to 8.9%. Subsequently, shares of Breadtalk gained up to 26.7% when it hit $1.16 on 3 April 2013. In contrast, the Straits Times Index (SGX: ^STI) barely moved in that time frame with a 1.9% increase.

Prior to the announcement, Breadtalk’s market value was roughly S$240m. So, the market thought Breadtalk – as a company – was suddenly worth almost S$64m more (26.7% of S$240m is equal to S$64m. So, Breadtalk was worth S$304m on 3 April 2013) after the disclosure of Minor International’s ownership stakes.

Woah, what happened?

But, a curious thing then happened. On Wednesday, Breadtalk yet again announced a change in Minor International’s ownership stake of the F&B company. This time, Minor International bought even more shares and now owns 10% of Breadtalk.

And how did the market respond? Well, Breadtalk’s shares fell by 7.3% to $1.08 on Thursday. Let me get this straight. First, the market thought Breadtalk was worth S$64m more when Minor International’s stake in the Singaporean company increased from 6.3% to 8.9%. Then, the market thought Breadtalk was worth $22m less (7.3% of S$304m is equal to S$22m) when the Thai company’s ownership stake increased to 10%.

What’s going on here?

Mr. Market’s Here to Serve

Truth is, I don’t know what’s going on. In fact, I doubt anybody knows what’s really going on. And that’s what characterises the stock market. Short-term wiggles are largely unfathomable and can happen for no fundamental changes in the business. What’s important is that, more often than not, share prices for businesses with improved profits, cash flow and balance sheet strength will trend upwards in aggregate over the long run. The reverse is true for businesses with deteriorating fundamentals – prices tend to move downwards.

If we think about Breadtalk’s situation, customers in their Ding Tai Fung restaurants, Breadtalk and Toastbox outlets and Food Republic food courts will not stop coming because a Thai company has been buying up shares. In other words, its fundamentals remain unchanged. So how can its value fluctuate upwards by S$64m and then crash by S$22m, as suggested by the market’s reaction, all in the space of 10 days?

Benjamin Graham, the intellectual father-figure of value investing, introduced an allegory in his book The Intelligent Investor. The allegory concerns the character Mr. Market and Warren Buffett (famed investor and mentee of Graham) had this to say about it:

Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his. Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but.  For, sad to say, the poor fellow has incurable emotional problems.  At times he feels euphoric and can see only the favorable factors affecting the business.  When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains.  At other times he is depressed and can see nothing but trouble ahead for both the business and the world.  On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

What this means is, the stock market and individual share prices can sometimes move without logical reasons and an investor should ignore that and focus on the business’s fundamentals to appraise its intrinsic value. And in the case of Breadtalk, its investors should forget about Minor International and the market’s reaction to it and instead focus on what’s Foolishly important – how well the business is doing.

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The Motley Fool’s purpose is to help the world invest, better. The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Contributor Chong Ser Jing doesn’t own shares in any companies mentioned.