SINGAPORE (Feb 23): BreadTalk on Thursday announced that FY17 earnings doubled to $21.8 million from $11.4 million in FY16.

The stronger botttomline came on the back of lower cost of sales and losses from associates as well as higher other income and interest income.

Revenue was 2.5% lower at $599.7 million and cost of sales was 4.0% lower at $599.7 million, bringing gross profit to $333.3 million, 1.2% lower than FY16.

Other income was 12.3% higher at $33.2 million, while interest income increased 92.3% to $2.23 million.

Losses from share of results of associated narrowed by 54.9% to $0.88 million, compared to a loss of $1.96 million in the previous year.

The group declared a special dividend of 1 cent and final dividend of 2 cents.

<hr/><a href="https://www.theedgesingapore.com/breadtalks-fy17-earnings-double-218-mil">See: BreadTalk's FY17 earnings double to $21.8 mil</a><hr/>

Following the results announcement, RHB is maintaining its “buy” call on BreadTalk with a lowered target price of $2.00.

The research house is maintaining its “buy” call for now, but reckons that there could be some near-term slowdown in earnings growth as the group is now back on its capex expansion phase.

The group in 2016 completed the rationalisation of Food Atrium’s store and this division saw the strongest margin expansion in 2017 in the absence of impairments and record-low vacant stall rates.

In a Friday report, analyst Juliana Cai says, “We think the outlook for Food Atrium remains bright in 2018, as BreadTalk seeks to explore more direct-operated restaurants with smaller outlet space and higher revenue.”

This concept requires lower capex and better control of tenant vacate rates, which should help to drive higher profitability for the group in the years ahead.

Meanwhile, underperformance in China and Singapore, as well as the closure of eight franchisees in China has caused revenue and EBITDA for the bakery segment to fall.

The analyst believes that this shortfall would be offset by the expansion of the group’s franchisee network in other parts of Asia, such as in India.

<hr/><a href="https://www.theedgesingapore.com/breadtalk-signs-franchise-agreement-expand-india">See: BreadTalk signs franchise agreement to expand into India</a><hr/>

Group CEO Henry Chu cited procurement as one of the weakest links when he worked with BreadTalk’s R&D team.

Hence, Chu believes that the new joint venture (JV) with Shinmei Co should help improve its procurement cost and that gross margin may improve by 1 ppt while its could also help with the procurement for the group’s other partners in the longer term.

<hr/><a href="https://www.theedgesingapore.com/breadtalk-jv-century-old-japanese-food-trader-and-supplier">See: BreadTalk in JV with century-old Japanese food trader and supplier</a><hr/>

In addition, the group’s new 4orth division – the incubator division for new concept brands – is coming along well.

“So far, the first JV Song Fa outlet in China has outperformed management’s expectations during the first month. We are fairly optimistic about this division as management expects the cash payback period to be less than 12 months,” says Cai.

<hr/><a href="https://www.theedgesingapore.com/breadtalk-and-song-fa-open-first-bak-kut-teh-restaurant-shanghai-jing-kerry-centre">See: BreadTalk and Song Fa to open first bak kut teh restaurant in Shanghai Jing An Kerry Centre</a><hr/>

The group is also looking to partner with more F&B concepts in the near term.

However, expansion is not without cost as the analyst thinks that rising headquarters costs and pre-opening costs for Din Tai Fung in UK, as well as new F&B concepts could slow EBITDA growth momentum in the near term.

“We note that overhead expenses also shot up by around $7 million in FY17, mainly due to higher staff costs and bonuses,” says Cai.

As at 12.10pm, shares in BreadTalk are trading 5 cents higher at $1.80 or 3.5 times FY18 book with a dividend yield of 2.9%.

BreadTalk serves up a stronger bottomline this Lunar New Year

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