SINGAPORE (May 9): DBS Vickers Securities is maintaining its “buy” call on BreadTalk Group while lower its target price on the counter from $2.05 to $1.98 after factoring in higher interest costs from increased borrowings due to the group’s ongoing business expansion.

This is because BreadTalk is planning to build a larger central kitchen in Shanghai to cater to its future China expansion plans, while higher borrowings are also anticipated from a $100 million increase in the group’s medium-term notes.

See: BreadTalk partners Wu Pao Chun Bakery to expand into 4 major China cities

Nonetheless, the research house is positive on the group’s outlook of better margins going forward, specifically from the higher restaurant contribution and turnaround of its Food Atrium business, which was most evident in the 3.3% on-year revenue growth it registered in 1Q18.

In a Monday report, lead analyst Alfie Yeo opines that BreadTalk’s latest set of results reflect “decent core performance” in spite of the headline earnings disappointment.

This comes after BreadTalk last week reported 1Q18 earnings of $1.18 million, down 89.1% from $10.8 million in 1Q17 in the absence of a one-off gain recognised a year ago on the group’s divestment of TripleOne Somerset.

See: BreadTalk's 1Q earnings fall 89.1% to $1.2 mil on absence of one-off gain

“Although there will be some drag in the Bakery business in China in the immediate term, we believe the outlook is positive in the longer term as continued restructuring including closing non-performing stores and franchisees will strengthen its operations. Nonetheless, margin improvement in Foodcourt and Restaurants were more than able to offset by the drag in the Bakery division,” notes Yeo.

As such, DBS has left its core EBIT projections largely unchanged although it has imputed higher interest costs to reflect higher net borrowings, as capex this year is expected to hit around $60 million compared to $36.5 million a year ago.

The lower target price comprises a core F&B business multiple at 22 times FY19F P/E at the share price of $1.67; investment properties at 49 cents based on market value, and net debt at -18 cents per share.

Further, Yeo highlights the possibility of special dividends should Perennial sell AXA Tower, in which BreadTalk has a 5.31% stake. He estimates the group could potentially pay out 4.5 cents in special dividends in such a scenario.

“We remain positive on the stock and see growth ahead driven by margin expansion. Asset sale continues to be a stock catalyst. A potential sale of its stakes in properties such as CHIJMES and AXA Tower will unlock shareholder value if they materialise,” says Yeo.

As at 11:33am, shares in BreadTalk are trading 2 cents lower at $1.76 or 25.2 times FY18F book.