RHB: BreadTalk’s acquisition of Food Junction is ‘too expensive’

BreadTalk outlet in Singapore; taken September 2018.BreadTalk outlet in Singapore; taken September 2018.

BreadTalk’s planned acquisition of food court operator Food Junction appears too expensive and earnings dilutive, RHB said in a note Monday.

On Monday, BreadTalk said its wholly owned subsidiary Topwin Investment Holding entered a deal to acquire food court operator Food Junction Management (FJM) from Food Junction Holdings for S$80 million.

RHB said the deal’s valuation looks too expensive, coming in at a price-to-book ratio of around 6.7 times, compared with listed food court operator peers Koufu and Kimly, which trade at 3.7 times and 2.8 times 2019 price-to-book respectively.

“Due to the insignificant earnings, the price-to-earnings multiple looks high at the moment. However, it is unclear if this is due to one-off
expenses or poor operations,” RHB said.

The brokerage noted Food Junction opened a new food court at Century Square in 2018 and two this year, one at Great World City and another at Jewel Changi Airport, with another planned in Malaysia for next year.

“The new openings could potentially contribute to higher start-up costs before sales ramp up,” RHB said, noting Food Junction’s pretax profit was likely positive in the fourth quarter.

On the upside, RHB noted the consolidation of Singapore’s food court and coffee-shop operators may bring increased bargaining power when negotiating leases with landlords.

It noted coffee-shop chain operator Broadway acquired 23 S11 coffee shops, while NTUC Enterprise bought 80 Kopitiam outlets last year.

Food Junction operates 12 food courts in Singapore and three in Malaysia, with one more expected to open in 2020 at The Mall, Mid Valley Southkey in Johor, Malaysia; in addition to bakery and other food operations, BreadTalk also operates food courts under the Food Republic and Food Opera brands in Singapore, Malaysia, China, Hong Kong, Taiwan, Cambodia and Thailand.

RHB kept a Neutral call on BreadTalk’s shares with a S$0.71 target price.

Shares of BreadTalk were down 2.26 percent at S$0.65 at 3:34 P.M. SGT.

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