Where Can BreadTalk Group Limited Find Growth Next?

Two weeks ago, I covered the business segments of BreadTalk Group Limited (SGX:5DA). This week, I would like to look at the geographical revenue spread of the food purveyor.

As a recap, BreadTalk Group has been a huge winner over the past five years. From 1 January 2009 to its closing price last Friday, it has made capital gains of 331%. By comparison, the total returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was 79.3% for the same duration.

Breaking bread

Breadtalk geographical revenue breakdown

Source: Company Annual Report

Singapore, China, and Hong Kong make up 92.5% of BreadTalk’s revenue in the financial year ended 2013 (the company’s financial year coincides with the calendar year). Of the trio, Singapore provided the most with a 50.4% slice of the pie in that year.

Singapore has also grown incredibly fast for Breadtalk with revenue climbing by 129% from 2009 to 2013. In comparison, revenue from China and Hong Kong only grew about 102% and 82% respectively over the same period. The sales from ROW (rest of the world) almost tripled during that timeframe, but still remains a small piece of the overall sales pie.

To see what is driving the growth in each geographical segment, we can look at the growth in the number of outlets by country for each business segment. As a brief refresher, BreadTalk has three business segments, namely, Bakery, Restaurant, and Food Atrium.

Breadtalk bakery outlet count

Source: Company Annual Report

Mainland China comes up tops in the number of bakeries. The number of bakery outlets in the country had surged by more than 172% over the past five financial years, coming in at 365 outlets as of the end of 2013. Interestingly, Singapore and Indonesia have almost the same number of outlets at 120 and 121 respectively. In comparison, Hong Kong only has 22 outlets so far.

Breadtalk food atria count

Source: Company Annual Report

Mainland China comes up tops too for the Food Atria business segment with 32 outlets as of the end of 2013. Outlet growth, however, only picked up in the past financial year. As Food Atria provides more sales per outlet as compared to bakeries, it is likely that Hong Kong’s revenue growth came about in part due to this business segment. From my previous article covering BreadTalk’s business segments, the Food Atria’s profits were a little lackluster, so all eyes will be on China to help this segment to improve its profit contribution. China currently accounts for more than half of the company’s total Food Atria outlets.

Breadtalk Restaurt count

Source: Company Annual Report

For the number of restaurant outlets, Singapore comes up tops with 32. The restaurant outlet count in Singapore had expanded really quickly from 6 in FY2009 to 32 in FY2013. This segment is likely the main driver of sales in Singapore for the past five financial years, and one of the reasons why most of Breadtalk’s revenue comes from Singapore. China, unfortunately, saw the closure of two restaurants in the second quarter of 2014 – the region only had eight restaurants in FY2013.

A quick look forward

On 1 August 2014, Minor Food Group (‘MFG’) and Breadtalk established a 50-50 joint venture company to operate BreadTalk bakeries in Thailand. This comes after MFG had bought an 11% stake in BreadTalk in 2013.

At the moment in Thailand, Breadtalk only has 23 company-owned outlets for the BreadTalk and Toast Box brands. It also has three self-operated Food Republic food atria and two franchised Din Tai Fung outlets. This joint-venture with MFG may represent an area of growth for Breadtalk in Thailand which is worth watching.

Bringing together what we have learnt from my previous article, China will continue to be the key for growth for all three of BreadTalk’s business segments. There is an even bigger opportunity for the Restaurant segment in China as the company only has a relatively small outlet count in the country. Additionally, as we have seen in my previous article, the Restaurant segment is the most profitable one for the company. At 32 restaurants, we also might not want to expect too much future growth of existing concepts for Singapore.

China also houses close to 50% of BreadTalk’s outlets for the Bakery segment and about 55% of the Food Atria segment. Despite the much larger retail footprint in China, sales in Singapore are still more than half of the company’s revenue. As such, the sales per outlet is likely to be lower in China, and should be an area where we should look for improvements 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 the company’s share price is supported by the quality of growth that we are looking for.

China is one of the main growth areas for BreadTalk. According to a Straits Times report, chief executive officer George Quek spends most of his time between China and Singapore. This may be a hint of where his focus is. In the same article, it was also mentioned that Mr. Quek had partnered Johnny Andrean for BreadTalk’s operations in Indonesia. At 121 outlets currently, the partnership looks to be successful and worth watching for future developments.

Sales from Singapore and Hong Kong have done extremely well over the past five financial years but may be more limited for the next five years and beyond. Although growth is exciting at Breadtalk, it would pay for investors to monitor the debt levels at the company closely and also keep an eye on how future growth will be funded.

Based on last Friday’s close, BreadTalk currently trades at a rich price-to-earnings ratio of 29.2 and has a dividend yield of 1.3%.

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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.