Known for its pork floss buns, BreadTalk Group Ltd (SGX: CTN) has been extremely aggressive in expanding its business. The group, which owns famous franchises such as Din Tai Fung and Toast Box, has been increasing its shop count over the last few years, both in Singapore and overseas.
However, despite its portfolio of well-loved F&B brands and aggressive expansion, the group has struggled of late, with profits highly erratic and revenue stagnant. On top of that, there are some worrying signs that investors should keep an eye on.
Concern #1: High debt load
Expanding its business has come at a cost for BreadTalk. As of end-March, the group has run up its total debt load to S$213 million. At the same time, it only has S$151 million in cash, putting in a net debt position of S$61 million.
Source: BreadTalk Group Ltd 2019 Q1 Earnings Presentation
To put that in perspective, that is around S$21 million higher than it was a year ago. It also means that it’s net debt-to-equity, a key financial metric used to gauge how highly leveraged a company, stands at a fairly high level of 51%, while its total debt-to-equity was 176%.
With the US Federal Reserve increasing interest rates last year, the high debt load could come back to haunt the company when its debt needs to be refinanced.
Moreover, BreadTalk’s interest expense on its borrowings worked out to S$2.3 million in the first quarter of the year. Considering that the company earned around S$9.4 million in earnings before tax and interest (EBIT), the interest cover was only around 4.0 times.
As such, interest rate fluctuations could have a material impact on the company’s bottom line in future quarters.
Concern #2: Volatile free cash flow
While BreadTalk continues to generate healthy cash flow from operations, it has been aggressively using the cash to finance its expansions. This has resulted in volatile free cash flow.
In the first quarter of 2019, the company generated only S$6 million in free cash flow and just S$17 million in the whole of 2018. This was a steep decline from the S$47 million it generated in 2017.
Concern #3: High valuation
BreadTalk is still in its growth phase and the market has lofty expectations for the company. As such, despite the high debt load and erratic free cash flows, BreadTalk shares still sports extremely rich valuations.
At the time of writing, its shares trade at S$0.80 per share. This translates to a market capitalisation of S$453.8 million, around 26 times its free cash flow generated in 2018 and 50.8 times its 2018 earnings. With so much optimism baked into the stock, investors should be cautious when dealing with the company.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore writer Jeremy Chia does not own shares in any companies mentioned.