BreadTalk Group Limited (SGX: CTN), or BreadTalk for short, is a food and beverage group with close to 1,000 retail stores spread across 16 countries. The group has four main divisions – bakery, restaurant, food atrium, and “4orth food” concepts. It also has a brand portfolio consisting of well-known brands such as BreadTalk, Toast Box, Food Republic, and Bread Society, to name a few.
As the group is very diversified with operations in many countries, and also runs many different food and brand concepts, I thought about how to make sense of the business and its performance. Here is one ratio which investors can rely on to assess how BreadTalk’s business divisions are performing and I’ve summarised it in the table below.
Source: BreadTalk Group’s Q1 2019 Presentation Slides (Author’s compilation)
The profit before tax margin
BreadTalk discloses its profit before tax (PBT) margin for each of its divisions and I found it to be an insightful ratio to use to assess the performance of each of its divisions. The PBT margin captures all the expenses relating to each division, including staff costs, marketing, and administrative expenses, as well as any related finance costs which are allocated to each division. By reviewing the PBT margin, we can conclude how efficient each division is in dealing with expenses and also how well it is performing versus the group level PBT margin.
Bakery is the largest division but with weakest PBT margins
BreadTalk has three main divisions – bakery, food court and restaurants contributing to the bulk of group revenue. As can be seen in the table, the bakery division (which consists of the Toast Box brand) is the largest division for BreadTalk, contributing nearly half of total revenue in each fiscal year. However, it also has the lowest PBT margins at 1.4% in Q1 2018 and 0.7% for Q1 2019. This implies that even if BreadTalk were to grow this division further, it may not contribute much to overall profits as group PBT margin for Q1 2019 was higher at 2.3%.
Weaker PBT margins
I also noticed that apart from the Food Atrium division, both the bakery and restaurant divisions are seeing weaker PBT margins year-on-year, with the decline especially pronounced for the restaurant division as its PBT margin plunged from 20.1% in Q1 2018 to 8.9% in Q1 2019. On a group level, the overall PBT margin was also weaker at 2.3% versus 4.1% a year ago.
What BreadTalk needs to do
Though the above does not seem healthy, BreadTalk can take several steps to improve its numbers. It should work on expense control for its key bakery division in order to improve PBT margins there or it could choose to build up and grow both its Food Atrium and restaurant divisions so that these divisions’ share of revenue is higher, given their relatively higher PBT margins.
Investors need to monitor this ratio over the next few quarters as a further deterioration in the PBT margin for the bakery division could push the division into a loss. If the group continues to see PBT margin declines across other divisions, this could also be another red flag for investors.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in BreadTalk Group Limited.