Is BreadTalk Group Limited Still The Talk of The Town?

BreadTalk Group Limited (SGX: CTN) is a multinational food and beverage business listed on the Singapore Stock Exchange. It started off as a bakery brand in Singapore in the year 2000 and was listed on the public stock exchange in the year 2003.

BreadTalk Group underwent significant growth under the leadership of its founder and chairman Mr George Quek. It has grown beyond its traditional bread and butter business by venturing into other food and beverage businesses like managing food courts under the Food Republic brand. The company has also ventured into successful restaurant franchises, most notably the Din Tai Fung franchise in Singapore. 

Under the shrewd leadership and management, BreadTalk became one of the most recognized brands and darling stocks of Singapore. Ever since IPO, share prices have tagged along with its year-on-year increasing profits. 

However, as of recent months, the share price of BreadTalk Group has seen some major corrections. The share price has tanked around 51% from the peak of $1.20 per share to a 3 year low of $0.58 per share. What has happened and is this a buying opportunity?

Before rushing into making any decision, it is wise to do a post-mortem to find out what caused the sudden drop in the share price. So, what went wrong with BreadTalk Group?

1. Flattish Revenue and Gross Profit

The food and beverage business is considered a defensive sector due to its business traits. Food and beverages are essential consumables that automatically rides on population growth even in the worst possible situation.

BreadTalk Group’s historical 5 years revenue has not shown any significant growth. Although the latest trailing twelve months (TTM) results show a hint of a resurgence, it has since warned of a full-year loss due to the unrest of Hong Kong and also widening loss of its bakery business in China and Thailand.

To add salt on wounds, several other brands under its portfolio are also reported not to be doing well, namely Wu Pao Chun, Song Fa, Tai Gai and Nayuki.

2. Fierce Competition from Multiple Fronts and The Wuhan Coronavirus Threat

BreadTalk Group has multiple business segments, which are divided into Bakery, Food Atrium, Restaurant, and 4orth.

The largest revenue contribution segment is still the Bakery segment, which contributes to 44% of its total operating revenue. 

Source: BreadTalk Group FY19 Q3 Report

However, their main business has not been growing. In fact, for the last 3 years, revenue contributed by the bakery division has been experiencing a dip. 

Although BreadTalk sells great quality bakery products, bread is a daily necessity with little or no brand loyalty. And with so many homegrown and artisanal bakeries like Cedele, Tiong Bahru Bakery and Baker & Cook, it is no wonder the bakery division of BreadTalk is facing major headwinds. 

BreadTalk Group’s Food Atrium Historical & TTM Revenue and outlet numbers 

Its next business vertical, which is also heavily under pressure is the Food Atrium business, which is basically the food courts under the brand of Food Republic situated in major shopping malls and other strategic locations. Singapore is no stranger to multiple listed food court operators, which include players like Kimly Limited and Koufu Group Limited.

Also, worth mentioning is the geographical exposure of BreadTalk Group’s revenue contributing countries. Singapore remains the main bulk of its business at 55% even though its added efforts to aggressively expand internationally. Next in place is Mainland China, whom as of today is taking the brunt force of the Wuhan coronavirus outbreak. 

With China heavily affected by the Wuhan coronavirus, BreadTalk Group would most likely see its upcoming revenues heavily affected.

3. Loss of Growth Plans & Overpaying for Food Junction Acquisition?

BreadTalk Group is well known for its aggressive merger and acquisition methods to further grow its business in multiple segments. Plus, the company is also tactful in handling franchise businesses. The Singapore Din Tai Fung business franchise is one of the great track records of BreadTalk Group being able to build a new business vertical that contributes positively to its income. 

But eyebrows were raised when BreadTalk Group embarked on its latest acquisition – a whopping S$80 million offer to buy Food Junction, a standalone independent food court. The offer made valued Food Junction at a price-to-book ratio of more than 6 times, while Koufu Group Limited only had a price-to-book ratio of around 4 times.

Though this purchase may have turned BreadTalk Group into the 3rd largest food court operator in Singapore, profit margin wise the food court business is not one of the lucrative business’s segments. 

It’s latest franchise with Wu Pao Chun bakery, to bring yet another bakery business into Singapore could potentially cannibalize its existing bakery business, not to also forget it is highly competitive and saturated with so many players around. 

Verdict

Looking at the current scenario and challenges that BreadTalk Group is currently facing, even though it used to be a stock darling with aggressive growth plans and generous dividend payout, I would definitely stay by the sidelines to further monitor the company rather than jump straight at the opportunity to acquire BreadTalk Group’s shares.

BreadTalk Group Limited is not a company shy of controversies either. From allegations of its China business using expired raw materials to the mislabeling of its prepackage derived soya milk as a “freshly prepared” product, are some of the mistakes that are not supposed to happen in the competitive food and beverage business. 

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