BreadTalk Group Limited (SGX: CTN) 2018 third-quarter earnings announcement may have disappointed some investors, as its stock slid slightly more than 5% since its announcement on Monday, 5 November. However, here are four things that may interest long-term investors.
The financial numbers
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Here are some financial highlights from the latest third quarter:
1) For the quarter, revenue increased 2.3% to S$157.7 million;
2) Net profit dropped 29.2% to S$2.7 million;
3) Core F&B profit also declined 29.2% to S$2.7 million over the quarter;
4) Earnings per share declined 29.4% to 0.48 cents per share;
5) Over the 9-month period from January to September, net profit was down 62.5% but core F&B net profit grew 5.2%;
6) The group is in a net debt position of S$42 million but has a manageable net-debt-to-asset ratio of 6.3% and net-debt-to-shareholder-equity ratio of 25%;
7) Despite a 100% increase in interest expense, interest cover was still a comfortable 7.48 times; and
8) BreadTalk generated S$19 million from operations and had free cash flow of S$8 million over the quarter.
What’s behind the numbers
As you can see, the numbers from BreadTalk’s third quarter of 2018 show a mixed performance. Despite higher revenue, profit dropped sharply. BreadTalk’s chief executive, Henry Chu, explained:
“The lower year-on-year profit during the third quarter was caused by one-off expenses in the run up to the opening of our Din Tai Fung business in London and other new businesses, as well as certain underperforming segments of our Bakery business which we are are already in the process of restructuring.”
On a positive note, its core F&B net profit, which excludes increased opening costs, improved over the last nine months. This improvement suggests higher profitability in its existing stores.
The group remains in a healthy financial position and has the financial muscle to continue to expand. It remained cash flow positive during the quarter. BreadTalk has a track record of reusing its cash from operations to open new stores and expand its business, which is a good sign.
Planting the seeds for the future
BreadTalk Group is on track to open its flagship Din Tai Fung branch in London and the first Food Republic outlet in Cambodia. This is a great step to its target for global expansion. Din Tai Fung is a well recognised brand globally already and has achieved a Michelin star status. London will further increase its global footprint and recognition overseas.
Despite the initial teething issues and start-up costs, I believe the investment to expand into London will reap long-term rewards, both financially and for its global brand recognition that could open up opportunity for further expansion into other countries.
So far this year, BreadTalk has already opened two new Din Tai Fung restaurants (one in Singapore and one in Thailand), with revenue from its Din Tai Fung operations soaring nearly 7.7% for the first nine months of the year. With its opening in London, it will take its total restaurant count to 28.
The group is also restructuring its under-performing bakery division, which I believe will improve the group’s profitability in the future. BreadTalk closed 15 franchised and 17 directly operated outlets in the last quarter. Below is the full breakdown of all its outlets:
Source: BreadTalk Group Limited 3Q2018 Earnings Press Release
Global expansion to drive growth
Over the last nine months, BreadTalk has experienced volatile earnings as it continues to invest heavily for its global expansion. As most of us know, global expansion may not always turn out positive. Many brands that work well locally cannot succeed overseas due to different cultures and consumer preferences. However, I believe BreadTalk’s Din Tai Fung has the potential to do well in London. It has already been given Michelin star status and Chinese food is well-established in the city.
Besides Din Tai Fung, the group also opened its first Song Fa Bak Kut Teh outlet in Beijing. Song Fa Bak Kut Teh is a well-known chain in Singapore and Chinese tourist queue up daily at the Clark Quay and Chinatown Point outlets. If its opening in Beijing in successful, it could open up more doors for expansion in the future.
With all that said, despite the lower profits in the quarter and over the first nine months of 2018, I am confident that BreadTalk is moving in the right direction to return to growth. Shares in BreadTalk have slid 3.7% since its earnings announcement. At the time of writing, it trades at S$0.90, which translates to a price-to-book ratio of 2.94 and a price-to-earnings ratio of 40.4.
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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 writer Jeremy Chia doesn’t own shares in any companies mentioned.