SINGAPORE (Sept 3): BreadTalk Group is licking its chops at the acquisition of Food Junction Management, which would make BreadTalk the third-largest foodcourt operator in Singapore behind NTUC Enterprise and Koufu.

But some market watchers are finding the $80 million price tag hard to swallow.

For starters, they note that Food Junction's net tangible assets are valued at only about $12.3 million.

“Valuation seems too expensive at a price-to-book ratio (P/B) of close to 6.7 times, especially when compared to peers like Koufu and Kimly, which are trading at 3.7 times and 2.8 times FY19F P/B respectively,” says Juliana Cai, an analyst at RHB Group Research.

“Based on the headline numbers, we think the acquisition is too expensive and earnings dilutive,” she adds.

Cai’s views are echoed by DBS Group Research analyst Alfie Yeo, who also notes that Food Junction reported a net loss of $1.7 million in FY18. And for the first half of FY19, the foodcourt operator had recorded earnings of just $3,183.

“Due to the insignificant earnings, the price-to-earnings (P/E) multiple looks high at the moment. However, it is unclear if this is due to one-off expenses or poor operations,” Cai adds.

Meanwhile, BreadTalk last year turned in earnings of $15.2 million for FY18, dropping nearly 30% y-o-y on the back of a $12.9 million increase in administrative expenses.

For the latest 2Q19 ended June, BreadTalk posted earnings of $1.0 million, less than half of earnings of $2.4 million reported in the corresponding quarter last year. This bring earnings for 1H19 to $2.3 million, some 35.3% lower than a year ago.

Against this backdrop, its proposed $80 million acquisition of Food Junction seems overpriced.

To be funded via a combination of internal resources and debt facilities, Cai notes that this would also raise the group’s net gearing to close to 0.9 times by the end of the year, from just 0.3 times in FY18.

BreadTalk says the proposed acquisition will allow access to Food Junction’s network of 12 food courts in Singapore and three in Malaysia. The group adds that it will also benefit from synergies through the streamlining of costs and sharing of resources.

See: BreadTalk buying over Food Junction for $80 mil from Auric Pacific

Indeed, the acquisition might be necessary as the industry undergoes a consolidation.

"With NTUC Enterprise buying Kopitiam in 2018, Broadway buying S-11 last year as well, and now BreadTalk buying Food Junction, the market for foodcourts and coffee shops is indeed consolidating,” says Yeo.

NTUC Enterprise had acquired 80 Kopitiam outlets for an undisclosed amount last year, while Broadway acquired 23 S-11 coffeeshops for an estimated $200 million.

“We believe the consolidation of the food courts and coffee-shops players brought an increased bargaining power when it comes to negotiation of rental rates from landlords,” Cai says.

Yeo also agrees that the larger network could provide scale to compete better in the market. “Foodcourts are a high fixed-cost business. Once revenue exceeds fixed costs, there is going to be a high margin potential," he adds.

The company will be making an application to the Consumer Commission of Singapore for a ruling on the proposed acquisition.

The deal is also conditional on the approval of shareholders at an EGM to be convened.

Already, BreadTalk founder George Quek Meng Tong and his wife Katherine Lee Lih Leng, who together hold 52.54% of the issued shares in the company, have provided irrevocable undertakings to vote all the shares held by them in favour of the proposed acquisition.

Quek was one of those who helped start Food Junction back in 1993.

As at 1pm on Tuesday, shares in BreadTalk are trading 1.5 cents lower, or down 2.3%, at 65 cents.