Friday 17 January 2020

Let the blog talk about BreadTalk

BreadTalk(SGX:CTN) released its profit guidance  on 16 January 2020, citing 3 main reasons for its net loss for the FY 2019

1. Widening of losses at the Bakery business in China and Thailand,

2. Widening of losses across several brands within the 4orth Division, i.e. Wu Pao Chun, Song Fa, Tai Gai and Nayuki, due to challenging operating environment, and

3. Significant deterioration in the financial performance of the Group’s businesses in Hong Kong across both the Bakery and Food Atrium Divisions due to the social unrest in the region.

Let's take a deeper look into the company and its recent results
-Breadtalk made 5.2 million in profits and 2.8 million to shareholders of the company, this means that it has incurred a loss of likely above 5.2 million on the whole or at least 2.8 million to the share holders of the company

-Hong Kong accounts for only 7.9% of its total revenue with non-current assets of 3.6%. Therefore I believe that the fixed cost should be low. Having said that, I remain puzzled how somewhere with only 7.9% of revenue can cause such a big loss when only a small amount of assets are there.

-As for the widening of losses in bakery division, part of the reason would be due to leases expense accounting that has made the results bad, the other half will be its poor operating margins that sink into negative level in the current financial year.

-Meanwhile for its 4orth division, I can't be too surprised with its poor results. The close substitutes to this segment would be companies like Japan Food, Old chang kee, R&S holdings. The results of these companies have been mixed and with lease expense accounting kicking in, the loss on the bottom line is expected. I reckon the restaurants have not hit a level where they are operating on a break even yet as the brands are still relatively less known apart from songfa and might take time to generate more recurring customers.

 What's next for the company?
- With a negative cash flow and net liability position, things have to turn quickly if they were to avoid a crisis themselves.

-They have 29% interest in Chijmes which they can sell for cash if really needed. Alternatively the tongzhou investment(5% interest only though)  will likely be completed in 2020 and 2023 which could provide some cash flow if successful.

-Alternatively there is always a chance to issue rights

Is BreadTalk a buy now?

-It's a Buy only if you believe in the brand story and its ability to expand overseas.

-Personally I do not think it is a buy as I believe that the overseas expansion story might have been a failure. Expanding food brands overseas is always a big risk and while everyone wants to be a Haidilao, not every company ends up being as famous.

To cite a personal example, I have seen toast box outlets in Hong Kong, but apart from the Singapore Selection foods like Laksa that I feel would be special to the customers in Hong Kong, I do not think that there is something else that I would not be able to find it in a normal hk style tea restaurant.

Perhaps building economies of scale in reducing cost via technology and consolidating its position as a leading bakery, food court and restaurant operator in Singapore would have been a much better plan. 

After all the food courts and restaurants have been the shining light of the company. Which is why i would also prefer food court operators like Koufu.

In expanding overseas,  I believe the cost saving synergy is not there and it would probably require a lot of outlets and investments for economies of scale to be reached.

Another possible pit hole to consider will be Wu Pao Chun's expansion in China, with the political results in Taiwan recently, it remains unsure how much Taiwan brands will be supported in China. Especially for those with many substitutes like bakeries.  

In other words, i think that the bread did the talk overseas but was unable to do the walk.