3 Wise Views on BreadTalk Group Limited

Three wise men were blindfolded and led one at a time into a room where an elephant stood. Each was asked to discern what was in the room without removing his blindfold.

The first, upon touching the elephant’s trunk, concluded a “snake” was in the room. The second, upon contacting a leg, concluded a “tree” was in the room. The third, upon grasping the tail, concluded a “rope” was in the room. All were surprised to discover the elephant once their blindfolds were removed.

— old Indian fable

You may have heard this old fable before. The three blindfolded wise men were not able to make a good guess of the complete picture (in this case, an elephant). It can be the same with investing.

For any potential investment, our own view may be limited, and we may miss some major points. We could always do with more intelligent and Foolish perspectives.

To demonstrate, let’s use local food & beverage retailer BreadTalk Group Limited (SGX: 5DA) as an example.

For a brief introduction, BreadTalk Group has three major business divisions: Bakery, Restaurant, and Food Court. These divisions house the different brands under the company’s portfolio including the flagship BreadTalk bakery outlets and the popular Chinese cuisine restaurant Din Tai Fung. To learn more about BreadTalk Group, go here.

With this company, I would like to share three possible views, from three differing investor personalities no less. They are the value investor, the income investor, and the growth investor.

The value investor’s view

BreadTalk Group closed at $1.40 last Thursday. At that price, the company sported a trailing price-to-earnings (PE) ratio of 32.

Meanwhile, the SPDR STI ETF (SGX: ES3) has a trailing PE ratio of 13.4. Given that the SPDR STI ETF actually closely mimics the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI), we can thus say that the average PE ratio of the market is also 13.4.

With that, we can see that BreadTalk Group has a significantly higher valuation than the market. As the value investor has a penchant for cheap bargains, he or she will likely balk at the F&B outfit’s “price tag.”

Furthermore, BreadTalk Group has a net debt position of around $116 million as of 31 March 2015 and does not generate much in way of free cash flow (more on this later).

The value investor, who is likely conservative by nature, would prize a strong balance sheet and the ability of a company to generate significant amounts of free cash flow; when we put all that we’ve seen with BreadTalk Group together, there may be little to be excited about the company for the value investor.

The income investor’s view

Like the value investor, the income investor may not be too impressed with BreadTalk Group either.

But first, let’s look at an area where the income investor may give BreadTalk Group a thumbs up. Over the past five years, the F&B outfit has had a decent track record with growing its dividends. As can be seen in the table below, BreadTalk Group’s annual dividend per share has increased by 80% from 1 cent in 2010 to 1.8 cents in 2014.

Financial year ended 31 December Dividend per share (Singapore cents)
2010 1.0
2011 1.0
2012 2.0
2013 1.3
2014 1.8

Source: BreadTalk Group’s website

Now, let’s head to the areas where the income investor may be giving a thumbs-down. The first negative point would be the company’s dividend yield of a little over 1% at its current share price; that’s a meagre figure when compared to the SPDR STI ETF’s yield of 2.7%.

Second, although BreadTalk Group’s dividend has been climbing over the timeframe under study, the company’s track record in generating free cash flow (operating cash flow minus capital expenditures) has been lackluster for the same period. This is apparent from the chart just below:

OCF FCF Breadtalk

Source: BreadTalk Group’s Earnings Report

On balance, there doesn’t seem to be much with BreadTalk Group to impress the income investor.

The growth investor’s view

In contrast with the value investor and the income investor, the growth investor might be a little more interested in BreadTalk Group.

Revenue Breadtalk

Source: BreadTalk Group’s earnings report

The growth investor would have noticed that revenue is up strongly across the board for BreadTalk Group over the past six years from 2009 to 2014. However, when it comes to profits, there is less to like. We can see why in the next chart below: The growth in profits for the different segments have been lagging revenue growth significantly.

Profit Breadtalk

Source: BreadTalk Group’s Earnings Report

Weighing the pros and cons, it is possible that the growth investor might still give BreadTalk Group a pass by virtue of the firm’s insufficient profit and above-average valuation (as mentioned earlier) despite him or her likely being intrigued by the strong top-line growth.

Foolish summary

So, there you have it. Three quick perspectives from three different investor personalities looking at the same company. Thinking as different investor personalities and coming up with different views can be a useful exercise for us.

Collectively, the differing views may be worth much more than the sum of its parts.

So, do you – Foolish reader – have another company of interest in mind? Why not give the differing views approach a try yourself and then share it with us? We all may become better investors from sharing our motley views.

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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.