8 things I learned from the 2019 BreadTalk AGM

A couple of years ago, I wrote that BreadTalk aimed to achieve a net profit margin of 8% by 2020. Yet so far, its net profit margin (2.1% in FY2018) is still far below its intended target. This prompted a shareholder at this year’s AGM to ask the management whether their target still remained valid.  

The answer was ‘yes’. But the bad news is that BreadTalk only has two years left to hit its target. Can they really achieve it? It looks like a far-fetched goal at this point in time. But I gained a few insights on what caused BreadTalk’s current depressed margins and how it plans to achieve its 8% target by 2020 when I attended the AGM.

Here are eight things I learned from the 2019 BreadTalk AGM:

1. BreadTalk reported year-on-year revenue growth of 1.7% to S$609.8 million in FY2018. Its core food and beverage business (ex-investment property value) saw profit grow by 1.1% to S$12.7 million.

Source: BreadTalk 2019 AGM presentation slides

On a segmental basis, the Bakery division was a drag with revenue and EBITDA falling in FY2018. The lower EDITBA for the 4orth and Restaurant divisions were mainly due to start-up costs for new outlets. Despite a challenging year, BreadTalk generated positive free cash flow of S$17 million.

2. The Bakery division declined in 2018 due to poorer performance and a lower store count – a decrease of eight outlets from a year ago to 863 outlets. Group CEO Henry Chu is directly overseeing the bakery division to turn around results and margins are expected to recover this year. A shareholder wanted to know whether the division was still a viable business in spite of competition. Chairman George Quek said that the bakery business in Singapore is still performing well on a standalone basis; it recorded same-store sales growth in the last two years. He acknowledged that the space was competitive and it’s important to be innovative to stay ahead. BreadTalk is also increasing automation by moving some front-line production to its back-end central kitchen to improve efficiency and margins.

3. The balance sheet remains healthy with a low net-debt-to-equity ratio of 0.31 and a interest cover ratio of 8.72 in FY2018. An analyst noted that BreadTalk had S$185 million in cash and asked why some of it wasn’t used to pay down the company’s loans of S$227 million. CFO Chan Ying Jian explained that there are some legacy investment assets tied to these loans which can only be freed up upon divestment. The company needs a cash buffer for working capital and expansion of new outlets.

4. The very first Ding Tai Fung restaurant in London is doing well. The good performance didn’t flow through to the bottom-line due to start-up losses as pre-opening costs for large restaurants are high in London. To operate profitably in London, the management figures it needs at least five operating restaurants and a centralized kitchen. It remains to be seen if BreadTalk’s investment in London will work out in the long run.

5. The 4orth food concepts division was also a big drag to the bottom-line mainly due to pre-opening costs of new outlets. The management intends to open three new Wu Pao Chun outlets and 15 new Song Fa Bak Kut Teh outlets in 2019. The CEO expects these new stores to achieve a 10% net profit margin on average. Barring unforeseen circumstances, net margins for the Restaurant and Food Atrium divisions should also be around 10%. Along with a recovery from the Bakery division in 2019, the CEO is confident that the overall net profit margin target of 8% is still achievable by 2020.

6. BreadTalk has been trying to expand in Thailand but progress has been slow. Previously, the management was confident that its joint venture with Minor Food Group would help BreadTalk’s growth in Thailand, but the partnership hasn’t worked out as planned. BreadTalk has since fully taken over their joint venture and will navigate the Thai market on its own moving forward.

7. BreadTalk acquired a 20% stake in NPPG (Thailand), a flexible plastic packaging producer, for around S$24 million. This worked out to a three times sales multiple for the loss-making acquisition. The Fifth Person investment analyst, Ong Kang Wei, questioned the rationale behind the transaction. The CEO explained the acquisition is a strategic one as NPPG produces a lot of food packaging and would be able to fulfill BreadTalk’s flexible packaging needs across its various food chains. BreadTalk could also potentially work with Charoen Pokphand Group (CP), who is an anchor investor of NPPG, including:

  • Tapping onto CP’s upstream agribusiness and food production. For example, the purchase of sausages from CP could help BreadTalk save a lot of money.
  • Distribution to over 12,000 7-Eleven outlets in Thailand, which is a subsidiary of CP Group.  A partnership like this has already been successfully made with Family Mart in China and BreadTalk intends to have this same arrangement with 7-Eleven in Thailand.
  • Co-location sharing with 7-Eleven in Thailand. Convenience stores there are generally larger in size and CP is potentially looking at sharing 40% of floor space at 7-Eleven stores with BreadTalk. This is one of the ways BreadTalk can expand its presence in Thailand.
  • BreadTalk, as a food operator, can also help CP run its 46 A&W restaurants and 12 Dean & Deluca grocery stores in Thailand.

The CEO added that although NPPG made a loss in 2018, results should improve this year as CP Group sent their turnaround specialist who has successfully turned around three companies before.

8. FR Rewards, a loyalty and payment app, was launched last year which allows users to pay for meals at all Food Republic outlets and earn points for every transaction. I actually tried signing up for it when it first launched but I faced issues with my registration and ended deleting the app from my phone. This year, I decided to give the app another shot after seeing an advertisement for it at Food Republic. However, to my surprise, the food stall operator didn’t know how to use the app and a manager had to be summoned to help me out. On another visit, the app didn’t list the stall I was buying from and so I wasn’t able to use it. It’s great that BreadTalk is pushing digitization and rewarding loyal customers. At the same time, there’s a lack of staff knowledge about app and it still seems like a work-in-progress. Let me know if any of you face the same issues when using the app.

This article is written in support of the SIAS Q&A on Annual Reports initiative to raise the standards of AGMs, and encourage minority shareholders to ask questions, engage, and interact with the management of listed companies. Founded in 1999, SIAS is a registered charity, Institution of Public Character, and industry watchdog that aims to promote exemplary standards of corporate governance among Singapore-listed companies to ensure that investor rights and interests are protected.

Rusmin Ang

Rusmin Ang is an equity investor and co-founder of The Fifth Person. His investment articles have been published on The Business Times and Business Insider. Rusmin has appeared on Channel NewsAsia and on national radio on Money FM 89.3 for his views and opinions on how to invest successfully in the stock market. He believes that anyone, even with a regular job, can achieve more financial peace-of-mind by investing intelligently and safely for the long term.

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