BreadTalk cools down on opening new branches

Operating cost is a hot issue for BreadTalk as rental, wages, and food items erode its margins.

After opening 25 outlets this quarter, the Group slows down the number of store openings and are relying more on franchised outlets to lower its CAPEX. Administrative and selling costs currently account for 54.2% of the Group's revenue.

Here's more from Maybank Kim Eng:

Founded in 2000, BreadTalk has become a distinguished F&B brand regionally, with bakeries, restaurants, and food atriums at its helm. The group owns a selection of brands including BreadTalk, Toast Box, Food Republic, RamenPlay, and the Icing Room. It also manages franchises of Taiwan's Din Tai Fung and USA's Carl's Jr. To date, the group owns 500 outlets in 16 contries supported by a fleet of over 6,000 employees.

Breakneck speed of expansion slowing. In the past, Bread Talk always associated to be a growth play story, and had made it clear to investors that top-line growth was its priority, at the heavy expense of earnings growth. However, it appears the group has not only slowed down the number of store openings, but are relying more franchised outlets to lower its CAPEX. A closer look into its latest quarterly earnings also reveals an improvement in gross and EBIT margins year-on-year.

Though operating costs remain a pressing issue. The group opened another 25 outlets this quarter. 1Q12 revenue rose by 27.4% YoY to SG$106.1m, while net earnings grew by 10% to SG$1.1m, implying a net margin of 1% down from 1.2%. This is simply a seasonality issue as evident from historical data. Operating costs in rental, wages and food items, however, remain a problem in North Asia and Singapore. Administrative and selling costs currently account for 54.2% of the Group's revenue.

Still, valuations are undemanding and balance sheet is strong. The group's cash flow remains good, with stable inventory and receivables turnovers, along with improving cash conversion cycles. Keywise's exit has also lifted a long share overhang.

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