BreadTalk Group expansion spree will pay off soon

Its aggressive store additions in Asia will open up new revenue streams and help counteract ever-slimming operating margins.

Here's more from OCBC:

In terms of its operating profit margins, BTG performed slightly better (2.4% vs. 1Q11: 2.3%) as higher contributions from the Bakery and Restaurant segments – boosted by China sales and Din Tai Fung (DTF) operations respectively – helped to offset weaker results from the Food court division, which was dragged lower by the Chinese and Singaporean locations.

As a result, 1Q12 net profit climbed 15.1% YoY to S$1.4m although it fell -64.3% QoQ on seasonality factors (4Q is typically the strongest quarter). BTG’s top and bottom-line came in at 25.4% and 10.7% respectively, falling well within our expectations.

With growth in Asia remaining the bright spark of the global economy, BTG’s revenue growth should persist over the next three quarters as consumer demand continues picking up. As of 1Q12, the number of its outlets has grown 19.9% YoY (+3.7% QoQ) to 554. While it faces rising cost pressures – especially as it maintains its expansion phase – we believe that the development of additional revenue streams via a greater network of stores and brand offerings will minimize the negative impacts. In addition, BTG should start to see some trickle down benefits from cost rationalization and economies of scale and scope.

While operating margins may seem depressed, it is typical of a company undergoing an expansion phase. However, we retain our confidence in management’s ability in controlling costs and highlight the general stability in gross profit margins, which indicates that BTG’s management is effective in their cost control initiatives i.e. inventory control, purchasing ability etc.