SINGAPORE (May 23): RHB Research is maintaining its “neutral” call on BreadTalk with a target price of 93 cents after the group signed a joint venture (JV) agreement to bring new tea beverages as well as cafes to Singapore and Thailand.
To recap, BreadTalk has partnered Shenzhen Pindao Food & Beverage Management Co. to bring two popular Chinese tea brands, Nayuki and Tai Gai, to Singapore and Thailand with first right of refusal to operate in Malaysia, Indonesia and the Philippines.
Both brands are expected to see their respective first store openings under the JV agreement by this year.
See: BreadTalk in JV to bring new tea beverages and cafes to Singapore and Thailand
While RHB is positive on BreadTalk’s long-term potential with the latest development, the research house is of the view that it also presents a downside risk to near-term earnings due to increased start-up costs in 2H18.
In a Wednesday report, analyst Juliana Cai says the lack of players in the premium tea café space could enable Nayuki to “step up and fill the gap”, while Tai Gai also stands a chance in penetrating the Singapore market due to low barriers to entry in Singapore’s beverage space.
“We are positive on the prospects for these two brands [Nayuki and Tai Gai]. Singapore has seen strong demand for customisable tea ranges from the younger generation,” says Cai.
In particular, the analyst likes BreadTalk’s recently-established Song Fa JV and the Tai Gai concept it intends to bring to Singapore, as she believes these require smaller capex and are much easier to scale when compared to the group’s existing business.
“We note that management is targeting to achieve 8% net margin in 2022. Many of its recent JVs are expected to yield much higher margins compared to its existing business,” she adds.
Nonetheless, the analyst remains cognisant of the group’s plans to open a number of food and beverage (F&B) outlets this year, namely: two Song Fa restaurants in Thailand, another two in China, one Wu Pao Chun bakery in Shanghai, one Din Tai Fung in UK, and potential new outlets of Tai Gai and Nayuki in Singapore – all of which would translate to increased start-up costs in 2H18.
“We are positive on the longer-term prospects for some of BreadTalk’s new ventures, but note that the surge in new JVs and expected new store openings in 2H18 would result in start-up costs dragging bottomline growth this year,” concludes Cai.
As at 11.05am, shares in BreadTalk are trading 0.5% lower at 92 cents or 3.74 times Dec-18F book.
