Why BreadTalk Group should start worrying about its restaurant division

Repositioning efforts may have failed.

According to OCBC Investment research, as with its 1Q13 results, BreadTalk’s bakery and food court operations continue to show improvements across the various geographical locations. 

However, OCBC's main concern remains with the restaurant division, which saw sustained pressures related to the nonperforming Ramen Play restaurants and Carl’s Jr outlets in China.

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Repositioning efforts over the past two years have failed to improve the appeal of both restaurants – and while we welcome the move to shut down three Carl’s Jr outlets in China (three still remaining) – it may be more prudent to call time on these ventures to prevent further erosion of Din Tai Fung’s stellar performance.

BreadTalk’s 2Q13 results came in below expectations despite revenue increasing 20.7% YoY to S$126.5m. Higher operating expenses (+19.5% YoY to S$66.1m) – related in part to an ongoing restructuring exercise for its restaurant segment – caused operating profit to fall 15.1% YoY to S$3.8m and operating profit margin to slide 1.2ppt to 3.0%.

PATMI came in almost flat (+0.7% YoY) at S$3.0m, missing our estimates by about 10%, for a net margin of only 2.4% versus 2.9% a year ago. In light of its 1H13 performance, management declared an interim dividend of 0.5 S cents, which was the same amount declared over the same period last year.