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Looking at Breadtalk through the Eyes of an Investing Master

BreadTalkLogo

“It’s quite hard to wander the streets of Singapore without bumping into a Toast Box, Breadtalk, Ramenplay Din Tai Fung or Food Republic,” wrote David Kuo, my colleague here at The Motley Fool Singapore.

And if you happen to have patronised any of those food establishments, you’ll have experienced what food & beverage retailer Breadtalk (SGX: 5DA) has to offer.

Over the past five years ending 4 Dec 2013, the company has delivered great returns for shareholders, with its shares gaining 268% to S$0.92. In comparison, the broader market, represented by the Straits Times Index (SGX: ^STI), has moved up by ‘only’ 92%.

But while it has done very well in the past, the key question is, can it do well going forward? For that, we could use Peter Lynch’s checklist for some guidance.

Lynch has one of the most enviable track records in the investing world and he penned down some of his methods and investing philosophy in his best-selling book One Up on Wall Street. In it, he wrote about some of the checklists he uses to review and assess companies.

I’ve previously shared how this could be done with healthcare provider Raffles Medical Group. But, Breadtalk’s the star this time around, so let’s dig in!

1) The Price-Earnings ratio: Is it low or high for this particular company and for similar companies in the same industry? (Generally, low PEs are preferred)

Breadtalk, at its current price of S$0.92 per share, is valued at 21 times trailing earnings. That’s somewhat higher than the broader market’s PE ratio of 12.5, as represented by the Straits Times Index.

Even when compared to other food & beverage retailers, we can see that Breadtalk’s also on the higher-end of the valuation spectrum.

Company

Price

Trailing PE ratio

Japan Foods Holding (SGX: 5OI)

S$0.595

14

Soup Restaurant (SGX: 5KI)

S$0.24

22

Auric Pacific (SGX: A23)

S$1.28

11

Tung Lok Restaurants (SGX: 540)

S$0.24

N.A.**

**Tung Lok did not make any profits over the last 12 months

Source: S&P Capital IQ

2) What is the percentage of institutional ownership? The lower the better

The founder and chairman of Breadtalk, George Quek, together with his wife Katherine Lee (who’s also deputy chairman) owns more than half the company.

That leaves little room for other institutional investors, though an 11% stake in Breadtalk belongs to Minor International, a Thailand-based hospitality and leisure company.

3) Are insiders buying and whether the company itself is buying back its own shares? Both are positive signs

There hasn’t been any sustained buying activity from insiders or Breadtalk. But Minor International did spend roughly S$5.6m to purchase shares of the F&B retailer from May to August this year. Though, we have to note that the Thai company is a substantial shareholder and not really an insider.

4) What is the record of earnings growth and whether the earnings are sporadic or consistent?

Breadtalk has consistently grown its earnings for a good number of years, but the growth rate seems to have slowed. Earnings grew at a compounded rate of 47% per year from 2006 to 2009, but only managed to increase by 3.4% in 2012.

Net Income

Year

Year-on-Year % Change

S$3.5m

2006

 –

S$7.3m

2007

109%

S$7.8m

2008

6.8%

S$11.1m

2009

42.3%

S$11.3m

2010

1.8%

S$11.6m

2011

2.7%

S$12.0m

2012

3.4%

Source: S&P Capital IQ

5) Does the company have a strong balance sheet?

The F&B retailer does not have the strongest of balance sheets. Its latest third quarter results showed that it had S$69m in cash while carrying a total debt load that’s almost thrice as high at S$163m.

Also, Breadtalk’s total debt to equity ratio, at 167%, is more than twice that of the Straits Times Index’s corresponding figure of 78%.

6) Does the company have room to grow?

Back in October this year, the company had set itself a target of achieving S$1b in sales by 2016 and having more than 2,000 F&B outlets consisting of bakeries, food courts, and restaurants by 2018.

For some context, the company had achieved sales of S$509m over the last 12 months and had opened 782 F&B outlets as of 30 Sep 2013. So, what investors are looking at is a potential double in sales in three years’ time, and a store-count that will almost triple within 5 years.

Judging from those numbers, Breadtalk certainly thinks it has ample runway for growth.

Foolish Bottom Line

So there you have it, another quick run-through of how Peter Lynch’s check-list can be used for assessing companies, this time with Breadtalk being put through the wringer.

Do take note, however, that while Lynch’s checklist is useful, there are still other aspects of the F&B retailer that we have to dig into (which includes its cash flow situation and competitive advantages) before we can have a more complete picture of whether it can continue its market beating performance going forward. That’s something we should bear in mind.

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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 owns shares of Japan Foods Holding.