The Motley Fool

Does BreadTalk Group Limited Have a High-Quality Business?

BreadTalk Group Limited (SGX: CTN) 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. Its brand portfolio comprises well-known brands such as BreadTalk, Toast Box, Food Republic, Bread Society and So Ramen.

While BreadTalk owns many recognisable brands that Singaporeans are familiar with, investors need to understand if the business is a great one to own. In other words, it’s important to determine if the group has a high-quality business that can differentiate itself from the competition.

I looked into three aspects of BreadTalk in order to assess if the business could be a great one for investors to consider.

Revenue and net profit growth

The table above shows the five-year revenue, gross profit and net profit trend for BreadTalk. Investors should note that revenue has grown slightly over the last five years from S$589.6 million to S$609.8 million, but the growth has been uneven. Gross profit, however, shows a consistently increasing trend, which implies that the group is effective in controlling its selling prices and cost of goods sold.

However, net profit was much more erratic, starting off at S$22.2 million in 2014, but collapsing to S$7.6 million the next year. It then climbed back to a high of S$21.7 million in 2017 before declining by 30% year-on-year in 2018. Looking at how volatile net profit was, investors need to be mindful that expense control may be an issue for the group as it seeks to expand to other countries.

Gross and net margins

Next, we look at the gross and net profit margin trend over the last five years. The good news is that gross margins for BreadTalk are stable in the range of 52% to 56%, and have been increasing over the years. However, net profit margin fluctuated significantly as the group spent money on expanding its brands and opening new food concepts under its 4orth division. In addition, the net margin has also been consistently below 5%, offering little buffer for the group should the economy turn south.

Return on equity

The final metric to look at is the return on equity (ROE) for the business. The ROE measures the amount of profit generated for every dollar of equity capital. A higher ROE signifies a high-quality business as this means that every dollar of capital is able to generate higher levels of profit for investors.

For BreadTalk, only two years (2014 and 2017) saw ROE above 15%, and ROE had fluctuated significantly during the last five years too.

More consistency needed

The conclusion is that BreadTalk has some pricing power and competitive edge as it has managed to maintain its gross margin over the years, but it falls short of being a high-quality business as it has unstable net margins and also inconsistent ROE. Though ROE was high for some years, the fact is that BreadTalk could not consistently maintain it at a high level.

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 any of the companies mentioned.