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Can BreadTalk Group Limited Still Let Its Business do the Talking?

bread

Restaurants shares are perhaps one of the more easily recognizable names within Singapore’s share market. Their businesses are usually relatively easy to understand and some restaurants may even be near and dear to our hearts (or hungry tummies!).

We have previously shared in the past that there are 11 companies listed in Singapore which generate at least a third of their revenue from serving food. Examples include LifeBranz Ltd (SGX: L20), Tung Lok Restaurants (2000) Ltd. (SGX: 540) and BreadTalk Group Limited (SGX: 5DA). Although the trio are from the same sector, the performance of their shares has been quite different over the timeframe from 1 Jan 2009 to yesterday’s close. The chart below makes it clear.

Source: Google Finance; Breadtalk (Blue), Tung Lok (Red) and LifeBranz (Orange)

Among the three, Breadtalk has come out tops by delivering a total return (including reinvested dividends) of 471% in that timeframe.

While the return from Breadtalk has been tasty, as Foolish investors, we should look under the hood to understand what the possible business drivers for this move in share price could be.

A closer look

Breadtalk’s business can be separated to three major food groups (pun intended!). The first one is its Bakery segment which mainly consists of its flagship Breadtalk and Toastbox outlets, plus niche concepts such as Bread Society. As of the end of its financial year 2013 (Breadtalk has a financial year which coincides with the calendar year), there were 737 outlets (company owned and franchised) in total worldwide.

The next segment, Restaurants, boosts brands such as Din Tai Fung, Carl’s Jr. and Ramen Play. As of end of FY2013, there were 41 outlets in total. Lastly, the Food Republic concept makes up most of the Food Atrium segment where there are 58 outlets in total worldwide.

The revenue contributions of the three segments from FY2009 to FY2013 are shown below:

Source: Company earnings reports

Despite having less outlets, the restaurant and food atrium business segment has grown to make up almost half of Breadtalk’s total revenue for FY2013. Additionally, the Restaurant sales, in particular, has also grown by around 213% over this five year period, more than two times the growth rate (by percentage) of the other two segments.

Ideally, we would like to see profit rise together with the revenue increases. For that, we look into the profitability of the business segments.

Source: Company earnings reports

Despite making up the smallest percentage in total revenue, the Restaurant division makes up a disproportionate amount of Breadtalk’s bottom-line. This is seen when the segment contributed less than 23% of total revenue but clocked in around 36% of the total profit. Breadtalk definitely makes the best margins in the Restaurant segment. The Food Atrium profits however, have been a little lacklustre in comparison.

Finally, Foolish investors would look for the accumulated profits to end up on the balance sheet in the end. To do this, we look at the cash and debt developments of Breadtalk.

Source: Company earnings reports

Unfortunately, the aggressive growth in outlet count (from 342 in FY2009 to 836 in FY2013) and revenue has come at a cost. The company has taken on debt to fund part of the growth. However, the debt was not only used for business expansion.

Notably, Breadtalk has also been aggressive in taking stakes in securities such as junior bonds, ordinary shares, and preference shares in other companies like PRE 8, Perennial Somerset Investors Pte. Ltd., and Perennial Tongzhou Holdings. These investment securities are bought by Breadtalk in order to invest in real estate such as Chijmes (owned by PRE 8), 111 Somerset (owned by Perennial Somerset Investors), and 3 plots of land in the Beijing Tongzhou Integrated Development (owned by Perennial Tongzhou). As such, the investment securities on Breadtalk’s balance sheet has grown considerably as well.

Foolish take away

As lifelong students of Foolish long-term investing, it pays to look under the hood to understand whether a rise in a company’s share price is supported by the quality of business growth that we are looking for.

In the case of Breadtalk, its Restaurant segment growth is where Foolish investors might want to keep their eyes on. The future profitability of the company might depend on profitable growth within that segment. In addition, due to aggressive outlet expansion, a watchful eye is also needed on the profit margins for the Food Atrium and Bakery segments as well as the development of the company’s borrowing levels.

My look into Breadtalk does not end here. After all, what could be more fun than eating pork floss buns in the name of research? Tune in next week for more about the regions in which Breadtalk is growing.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.