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.
