BreadTalk Group (SGX: CTN), recently announced its acquisition of food court operator Food Junction Management (FJM) for S$80 million through subsidiary Topwin Investment Holding on 2nd September 2019.
According to the SGX filing, the total consideration of S$80 million will be paid in cash and will be funded through BreadTalk Group’s internal resources – including available cash on hand – and debt facilities.
While Food Junction is a household name in Singapore….does the acquisition even make sense?
We don’t believe it does in the slightest.
Before we tell you why it is first necessary to explain the backgrounds of both Breadtalk and Food Junction.
Introduction of BreadTalk
Starting with just 1 bakery outlet, Chairman Dr. George Quek, has rapidly expanded BreadTalk Group to become a distinctive F&B brand owner that has established its mark on the world stage with its bakery, restaurant and food court footprints.
Today, the group owns and operates more than 1000 outlets in 16 countries with a global staff strength of 8,000 employees. That comprises of more than 850 BreadTalk and ToastBox bakeries, 25 award-winning Din Tai Fung restaurants and more than 60 Food Atriums.
Based on its latest 1HFY2019 results presentation, the Bakery segment contributes about 45% of the total revenue. However, the Bakery segment also incurred a loss of S$1.4 million for its Profits before tax in the same period. The earnings have been propped up by the Food Atrium and Restaurant segments.
Geographically, Singapore accounts for more than half (55%) of the total business, followed by China and Hong Kong (24% and 8%) respectively.
Introduction of Food Junction
Founded in 2000, Food Junction was one of the pioneers to introduce concept-based food courts to Singapore.
According to their website, the company collectively operate a network of 11 food courts in Singapore and 3 in Malaysia, with another one scheduled to open in Johor Bahru next year.
With that in mind, let us delve in deeper to the acquisition dynamics.
Does the acquisition of Food Junction make sense?
For a quick recap, BreadTalk has proposed to buy the Food Junction Management for S$80 million, which is a subsidiary of Food Junction Holdings (FJH).
FJH itself is held by Auric Pacific group ltd (APGL) with a 98.1% controlling stake. In turn, the vendor APGL is ultimately controlled by Lippo Limited. Lippo Limited (HKEX: 226) is listed in the Hong Kong exchange and is the holding company of Lippo China Resources Limited (stock code: 156) and Hongkong Chinese Limited (stock code: 655).
Coming to the business in question, BreadTalk has revealed the rationale and calculations behind the purchase.
We were appalled when we saw that the net asset value of FJM is around S$12.3 million and the half-yearly profits come up to only around S$3,183 (annualized would be S$6,366).
Taking the price tag of S$80 million, BreadTalk is essentially paying a sky-high valuation of 6.5x book value and a whopping 12,566 times earnings! Yes, you didn’t read the latter wrongly – S$80 million divided by an annualized S$6,366 profits would give you a twelve thousand five hundred and sixty-sixt times Price to Earnings.
Source: Company Announcement
Furthermore, based on BreadTalk’s press release, it was assumed that the company will undertake an estimated S$49.6 million loan with the balance paid in cash. As seen above, a loan of that size would take a toll on both the earnings per share (EPS) as well as the gearing.
Taking the numbers off-hand, the EPS would fall about 11-12% as the loan would increase the interest expense by S$1.5 million while the EPS estimate is not adjusted for transaction fees and other frictional costs.
On the other hand, the loan would take the net borrowings (total borrowing less cash and bank balances) from around S$40 million to S$114 million. Hence, the company’s gearing ratio would balloon from 0.25x to 0.7x post-acquisition.
As we can see, the numbers do not make sense at all for the acquisition.
But what are the plans BreadTalk have in place that might change our perception? Below, we look at the more qualitative aspects of the acquisition.
Can they turn around/improve Food Junction?
BreadTalk group has provided the rationale behind the acquisition (emphasis by me in bold):
“The Proposed Acquisition will provide the Group with access to FJM’s existing network of food courts and F&B outlets, allowing the Group to both obtain additional revenue streams and benefit from the synergies with the Group’s existing food court and F&B outlet business through the streamlining of costs and sharing of resources.
Accordingly, the Proposed Acquisition is not considered to be a diversification of the Group’s business.”
In our opinion, the above statement pales in comparison to an exorbitant price tag they are giving Food Junction.
This inorganic expansion is neither an asset play nor a significant profit source. The announcement itself has already shown vital information on the increased debt and decreased profitability post-acquisition from the very beginning.
But let’s assume that BreadTalk will incorporate Food Junction into its current “Food Atrium” segment which earned S$78.3 million in revenue and S$7.2 million Profit before tax (1HFY19 figures). This translates to about 9.2% PBT margin which is pretty reasonable.
While we don’t have the revenue figures, we utilized the number of outlets to do a simple comparison. Given that BreadTalk’s 60 Food Atrium outlets garnered S$16.8 million in FY2018, FJM’s 12 outlets (based on the website) will give us approximately S$3.36 million in profits before tax.
And that is only if the Food Junction outlets can be improved to such level of profitability similar to BreadTalk’s ones. Even so, an S$80 million valuation will represent that BreadTalk is paying 23.8x P/E ratio for FJM.
To further put things in perspective, an S$80 million price tag can easily swallow either an established caterer like Neo Group (SGX: 5UJ) or restaurant-focused Japan Foods (SGX: 5OI) trading at market capitalizations of S$58.9 million and S$74.8 million respectively.
The bottom line is this – BreadTalk is overpaying for Food Junction.
Auric Pacific privatised Food Junction in June 2013 valued at around S$30.77 million and is now selling it to BreadTalk at S$80 million after 6 years – representing a 260% increase in price while they let go of a business unit that has been churning out crappy profits.
But we have yet to see any meaningful improvements from then on; in fact, Food Junction has performed worse than before based on the SBR article.
Even if BreadTalk management can turn around FJM to reasonable profitability levels, the acquisition would still not be justifiable in terms of P/E ratio when they can simply acquire F&B companies that are simply much more profitable out there.
In a nutshell, calling this acquisition a pretty bad deal is a horrific understatement.
There is provision for me to be wrong in a case whereby they (management) have determined that the contacts, the resources, and the synergistic partnerships offered under Food Junction can somehow impact business operations at a level previously unheard of – but then why not disclose that to its shareholders? Why hold it back?
All this has given me are more questions than answers. Retail investors who thought that this seemed like a step in the right direction should think twice and stay away. If Breadtalk is somehow able to materialise these invisible benefits to lower-cost drastically, it will show in their next statements.
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