Dissecting BreadTalk’s property and F&B business

Following my earlier post on BreadTalk, it is evident that the BreadTalk’s investments in various property interests has begun to bear fruit. In this blog post, I aim to find out what is the intrinsic value of BreadTalk’s property interest and thereafter evaluate the valuation of the BreadTalk F&B business.

The main reason why the true value of Breadtalk’s property interest is not reflected on the balance sheet is due to the accounting treatment of “investment securities” which was the accounting classification for 112 Katong and TripleOne Somerset.

The measurement basis extracted from the 2017 annual report is extracted for reference: “Held-to-maturity investments – Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group has the positive intention and ability to hold the investment to maturity. Subsequent to initial recognition, held-to-maturity investments are measured at amortised cost using the effective interest method, less impairment. Gains and losses are recognised in profit or loss when the held-to-maturity investments are derecognised or impaired, and through the amortisation process.”

Breadtalk interest in these “held-to-maturity investment” were in the form of junior bonds with interest in the respective property. During the period of holding, BreadTalk, being the holder of these junior bonds will enjoy a fixed interest payout. As such interests are measured at amortised cost, any gain or loss will only be recognised in the event of impairment (i.e. if property price fell) or when the property is divested. This also explain why BreadTalk gain on its interest in 112 Katong and TripleOne Somerset is only recognised upon divestment in FY2016 and FY2017 respectively.

WIth the benefit on understanding how BreadTalk’s property interest via “held-to-maturity” junior bonds is measured, I searched for publicly available information on how much BreadTalk’s property interest in Chijmes and AXA Tower has increased since it invested which I shared below. I also noted the valuation of the property at Chijmes from Perennial’s annual report which amounted to S$334 million.

https://www.straitstimes.com/business/property/consortium-mulls-over-selling-axa-tower-en-bloc

https://www.straitstimes.com/singapore/revamp-to-breathe-new-life-into-159-year-old-chijmes

Back of the envelope calculation on gain on property investment and BreadTalk share of gain are set out in the table below:

Property Acquisition cost ($mil) Renovation cost ($m) Cost ($m) Valuation ($m) Upside (%)
AXA Tower                              1,170 140                                            1,310                  1,650 126%
Chijmes 177 45                                                222                      334 150%
BreadTalk stake Acquisition cost ($mil) Upside (%) Implied valuation uplift ($m)
AXA Tower 8.496 126%                                              2.21
Chijmes 18 150%                                              9.08
                                           11.29

In short, BreadTalk’s balance sheet did not reflect the gain on its property interest of about $11.29 million. Do note I did not include any fair value uplift in BreadTalk’s other property interest in China as there are higher uncertainty on the eventual realisation of value.

How much is the market valuing BreadTalk’s core business

As BreadTalk share price continue to break new heights, I think it is reasonable to strip out BreadTalk’s property interest from its core F&B business. In view of the successful divestment of property interest in 112 Katong and TripleOne Somerset at a premium and more importantly rewarding shareholders via increased dividends, it is fair for the market to value BreadTalk business in both F&B as well as real estate.

S$m
Market capitaliation at 30 April 2018                              554.43
Investment properties                                39.46
Investment securities 72.068
Uplift from investment securities                                11.29
Implied market capitalisation less property interest                              431.61

The table above stripped out BreadTalk’s property interest from its markets capitalisation based on 30 April 2018 closing share price of $1.97, which incidentally is the ex-dividend date:

By taking out the non-core property interest of BreadTalk, the market is valuing the residual F&B business at $431.6 million of $1.53 per share.

Using a Price to Free Cash Flow metrics for the past 3 years yield the following ratio:

2017 2016 2015
Cash flow from operating activities                                    78                                  82                                                  66
Capital expenditure, net –                                 27 –                               32 –                                               37
Free cash flow from operatings                                    51                                  51                                                  29
Price to FCF 8.5 8.5 14.9

Based on the above analysis, the residual market capitalisation of the F&B business implied by the market after deducting BreadTalk’s property interest is reasonably priced at 8.5 times historical FCF for both FY2017 and FY2016. For FY2015, it is priced at 15 times.

The above analysis did not include growth plans which BreadTalk’s management has executed or laid down such as:

  1. Collaboration with renowned brand, Song Fa Ba Kut Teh to expand into China;
  2. Joint venture with 115-year old Japanese trading firm Shinmei Co Ltd for the sourcing, procurement and supply of flour, rice, sugar, dairy, seafood and product packaging for BreadTalk’s F&B business, franchisees and joint venture parners;
  3. Expanding the reach of highly successful Din Tai Fung to the United Kingdom via joint venture

BreadTalk seems to be doing all the rights moves for both its F&B business and property business. As shareholders, the key homework to do it to monitor key metrics such as free cash flow to ensure the sustainability of the business and of course do more first hand tasting at the nearest BreadTalk establishment (toastbox personally is one of my favourite indulgence).

I hope the above information will allow readers to distill the reason behind the share price rally and lend perspective on the valuation of BreadTalk.

P.S: The author is vested in BreadTalk.

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