19 May 2014

Breadtalk - a case of over-expanded yeast?

Breadtalk doesn't really need much of an introduction.  BreadTalk, Toastbox, Din Tai Fung are places I patronise and these businesses are buzzing. The rest like RamenPlay, The Icing Room and such don't excite me as much. Food Republic is reasonably well patronised, dependent on locations, but operates in a very commoditised space.

The figures below show just how much it has moved over the past year alone.  It was hence time to re-examine the company

Its debt level is horrendous at almost 180%.  The company is heavily leveraged as it seeks to expand.

Its gross margin is high at 53.01% and is reflective of its branding.  However, its net profit margin is very low at 3.01%.  Its businesses require significant material and manpower.  The later is an especially difficult problem in manpower scarce Singapore.  Given the low margin, scale probably matters to reap maximum economy of scale, and hence its drive to expand rapidly.

My sense is that it is likely over-priced right now at a P/E ratio of 29 and P/B of 4.21.  Dividend yield isn't great right now either at 1.28%.

A company with a brand name that I can recognise, but for now possibly over-priced.  Time to exercise caution.

Breadtalk Group Gunning for Growth [Singapore Stock Market News]
Breadtalk AGM 2014 by Rusmin Ang [Next Insight]

[Disclaimer. This is not a call to buy or sell. It is only a record for myself on why I bought this company and am maintaining a cautious outlook by selling down to a minimal holding at this time.]


Anonymous said...

I think you meant food republic instead of food junction?

High leverage is due to its real estate acquisition. Low new profit margin is due to its high depreciation due to its fast expansion. There are risk in such quick expansion w such leverage. But is 29 pe too high ? How about 25x pe? 20 x?


Lizardo said...

Oh yes, thanks for pointing out the error that it should be Food Republic and not Food Junction.

The kind of PE for such a rapidly expanding business doesn't shed any apparent light on whether it is doing well or not. So it remains to be seen how and when it would switch course and reap tangible benefit from scale. It is still on a Growth path.