SINGAPORE (Mar 19): RHB advises investors to sell BreadTalk and take profit given its current share price is approaching the target of $2.

The research house recommends buying back the stock when prices are closer to $1.70, which implies six times core EV/EBITDA plus investment properties’ net asset value (NAV).

This is due to expectations of rising capex and start-up costs which could result in a near-term overhang, said analyst Juliana Cai in a Monday report, especially since the group has more joint ventures (JVs) in the pipeline for the year ahead.

Cai notes that rising start-up costs and higher capex could limit a further upside in BreadTalk’s earnings growth, seeing how the group recently signed several new JVs, with a total number of new store openings expected to be ramped up over 2018.

“While we think the bulk of the bakery expansion is likely to be done through the franchisees, the group has plans to open three Song Fa outlets in China, one Din Tai Fung outlet in the UK and a few more Din Tai Fung restaurants in Thailand this year,” says Cai.

“There could also be new food atrium openings in China cities where BreadTalk has a strong track record. In addition, CFO Chan Ying Jian highlighted during the last analyst briefing that there could be a few more JVs coming up,” she adds.

Nonetheless, she is positive on the group’s medium-term prospects and believes its new ventures are essential for the group to achieve its five-year goal of lifting net margin significantly from its current level of 3%.

“BreadTalk’s share price has done well YTD, surging 14.1% and surpassing the FTSE Straits Times Index (FSSTI) by 10.9%. We believe the market has factored in the higher dividends as well as the potential earnings growth arising from the expansion of its bakery franchisee network and solid performance in its restaurant and food atrium divisions,” concludes Cai.

As at 11.23 am, shares in BreadTalk are trading 1 cent lower at $1.92 or 27.4 times FY18 earnings.

Take profit on BreadTalk before rising capex & start-up costs set in, advises RHB 

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Take profit on BreadTalk before rising capex & start-up costs set in, advises RHB

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