Food Junction buy spells short-term pain for BreadTalk: analyst

It could incur acquisition debt of S$50m along with assumed interest of 2.5-3.5%.

BreadTalk’s $80m acquisition of Food Junction is expected to weigh in on its margins and earnings amidst the latter’s lower profitability although the purchase lends support to BreadTalk’s long-term bid to dominate the Singapore food court scene, according to DBS Research. 

BreadTalk is likely to borrow additional debt of $50m along with assumed interest cost of 2.5-3.5%. “[Although] the fifteen Food Junction outlets will contribute to revenue...we impute lower operating margins at Food Atrium Division in FY20F due to Food Junctions’ lower profitability,” analyst Alfie Yeo said in a report.

“We estimate the group to incur around $1.8m of additional interest expense pa to fund this acquisition, an amount which is likely to offset most cost synergies derived from the acquisition,” Juliana Cai, analyst at RHB said in a separate report.

Against this backdrop, Yeo lowers operating profit margin assumption for FY20F to 8% (from 10% previously) before normalising to 10% by FY21.

Despite the short-term pains associated with the acquisition, the purchase is likely to cement BreadTalk’s long-term growth outlook especially since it cements the company's position as the third largest foodcourt player in Singapore, behind NTUC Foodfare/Kopitiam and Koufu.

BreadTalk can expect its portfolio of 14 foodcourts in Singapore and two in Malaysia to grow substantially as Food Junction brings in 12 more foodcourts in Singapore and 3 in Malaysia with one more opening next year in Mid Valley Southkey, Johor Bahru.

“Although we see some drag on EPS in the short term, the acquisition could be positive over the long term as foodcourt is a high fixed-cost business and once revenue exceeds fixed costs, there is high-margin potential,” said Yeo.

Unlike BreadTalk’s Food Republic that caters to the premium segment, Food Junction offers a different value proposition that targets the mass market. The average ticket size at Food Junction is 10-15% lower than at Food Republic, added Cai of RHB.