SINGAPORE (Aug 5): BreadTalk may have reported 7.9% higher 1H19 revenue of $321 million from a year ago, however earnings fell 35.3% due to 39.4% higher distribution and selling expenses of $169.2 million and lease expense of $7.3 million due to new accounting standards.

See: BreadTalk posts 35.3% drop in 1H earnings to $2.3 mil on increased expenses

Segmentally, revenue from the restaurant division grew 14% to $84.5 million in 1H19 with the addition of three outlets in Singapore and one in Thailand. However, Profit Before Tax (PBT) came in at $11.5 million, 12.6% lower from a year ago due to higher operating costs in Singapore and the United Kingdom operations which is still in the red.

Revenue from 4orth division -- which creates new F&B concepts and partners with other established brands -- more than doubled to $13.2 million, as Song Fa Bak Kut Teh started operations in Beijing, Guangzhou and Bangkok, while deepening the brand’s presence in Shanghai. Despite higher revenues, PBT for the division ended in a loss of $5.5 million, mainly due to startup costs of new outlets.

Revenue from food atrium grew 2.5% to $78.3 million as the division opened three direct operated restaurants (DOR) in Shanghai, Hong Kong and Bangkok. Same store sales growth remained strong across the entire portfolio with North China, East China and Hong Kong providing the main thrust. Stall vacancy remains low. PBT for the period rose 23.8% to $7.2 million.

Revenue from bakery division rose 2.8% to $142.8 million, with the consolidation of revenue from the Thailand Bakery business following the acquisition of the 50% stake in BTM (Thailand) from Minor Food Group. However, PBT came in at a loss of $1.4 million in 1H19 compared to a profit of $2.5 million in 1H18.

BreadTalk’s board has recommended a tax exempt interim dividend of 0.5 cent per share for FY19.

Despite the mix 1H19 showing, market watchers remain optimistic on BreadTalk’s outlook.

Firstly, although losses from the 4orth division widened q-o-q and y-o-y due to new store openings, management says no new brands will be added for the time being. Instead, it would focus on growing Song Fa outlets in Thailand and four major cities in China where it has the master-franchise rights.

So even though this will push back 4orth’s EBIT breakeven to 2020, the division is expected to produce margins similar to the restaurant division.

In addition, BreadTalk’s expansions into the local and Hong Kong markets through Wu Pao Chun and the expansion of Din Tai Fung in London, should also improve overall profitability due to more attractive margins and better sales mix.

See: BreadTalk partners Wu Pao Chun for expansion into Singapore and Hong Kong

Secondly, the restaurant division delivered a strong performance in 2Q19 with the addition of two new Singapore outlets in Jewel and Marina Bay Sands, which resulted in a sequential doubling of operating profit to $8.3 million. The new openings are in addition to Thailand’s Terminal 21 and Singapore’s Great World City outlets which opened in 1Q19.

Thirdly, FY19-20 operating margins are also expected to improve at group level, driven by higher proportions of revenue from its higher-margin restaurant and food atrium businesses. In addition, management has been focused on improving operational efficiencies and margins through initiatives such as better planning for demand and human resources, as well as tighter cost controls through lower food wastage and reduction in unnecessary payroll expenses.

As such, DBS Research Group and RHB Research are maintaining their “hold” calls on BreadTalk, with a target price of $0.77 and $0.71 respectively.

As at 4.06pm, shares in BreadTalk are trading 0.5 cent lower at 68 cents or 22.5 times FY21F earnings based on DBS’s valuations.