SINGAPORE (Aug 3): RHB Research is downgrading its call on BreadTalk to “sell” from “neutral” with a lower target price of $1 compared to $1.04 previously, as the research house expects FY18F earnings to decline on rising overhead costs and weaker JV & associates performance.

This comes after the group’s 2Q18 results missed expectations due to losses from associates and joint ventures (JVs), as well as a higher-than-expected effective tax rate over the quarter. Notably, the weaker performance was attributed to Jumbo China, Carl’s Jr Shanghai, and BreadTalk-Minor Thailand.

At the share price of $1.14, the stock is trading at 33 times FY19F P/E, which analyst Juliana Cai considers steep compared to the peer average of 18 times.

“BreadTalk’s core F&B business (ex-investment property value) is trading at 8.2 times FY19F EV/EBITDA,” notes Cai in a report on Friday.

“Though this is already a discount to peer average (10x FY19F EV/EBITDA), we think there could be more downside, given that its 3-year EPS CAGR of 6% pales in comparison to peer average of 14%... We believe there is limited upside at the moment, as it would have to outperform market expectations for further positive movement in share price,” she adds.

While Cai expects 2H18 results from BreadTalk’s Food Atrium division to remain “stellar”, she sees this being offset by the Bakery division due to closure of franchises in China, as demonstrated by the latter division’s lower profitability in 2Q.

On BreadTalk’s new investments, the analyst acknowledges that the group’s expansion plans involving Song Fa, Wu Pao Chun, Nayuki, Tai Gai and Din Tai Fung could derive higher margins in the long run – but thinks these ventures would nonetheless slow overall EBITDA growth with higher overheads and branding costs.

“Coupled with negative performances from associates and JV and higher effective tax rate, we lower our FY18F-20F EPS by 16-19%,” concludes Cai.

As at 4:11pm, shares in BreadTalk are trading 1 cent lower at $1.13 or 4.63 times Dec-18F book value.