Breadtalk

[shanrui_91]

Just sharing my view on BT intrinsic value... which I posted on other forum. Which model is right? Your call.

-------------------------////---------------------------

Base on Earning model, the 'intrinsic value' is $1.22
Parameter:
EPS CAGR (10 yrs) of 22%.
Discounted rate: 3%

** Academic study only **. If you are firm believer of value investing, you will appreciate the model.

......................................................

Base on cashflow "intrinsic value" calculation, the intrinsic value of BT is ~ $2.41

Parameter:
Cashflow grow projection = 6.5%. (50% discount of 5 years CAGR 13%)
Dscount rate = 4%

Compare to current price of $1, the margin of safety is ~60%.

Well, please take above as academic discussion.
It does not take into consideration of overall market sentiment and trend.

p.s. please don't ask me for 'intrinsic value' calculation.

For your first model, I suppose that you use historical CAGR to project future growth rate. However, it is very dangerous to do so without understanding what has allowed the company to grow at 22% per annum and is it be able to do so for the next 10 years. 22% CAGR for 10 years is a very optimistic projection and will make many companies look exceptionally cheap.

As company matures and grow, they will have to slow down eventually. For a retailer/franchisee, it will be either coming from new outlets opening or same store sale growth. If it is to open new outlet without adopting franchise model, you will need to invest cashflow into PPE. In addition, profit margin will also be hit with new store gestation. One good thing about breadtalk though is its negative cash conversion cycle. For franchise, that will be how much capital your franchisee have as well as how much profit your franchisee gets to earn. I doubt breadtalk can achieve 22% cagr just by same store sale growth.

As for your cashflow model, did you use free cash flow or did you use operating cash flow? If you foresee expansion, PPE will be higher and this will affect your FCF. Secondly, is your projection to perpetuity? If it is 6.5% might be too high. Not many businesses are able to grow more than 5% for infinite period.

The dangerous thing about all these model is that your assumption is crucial for your valuation. Try to do a sanity check by asking yourself if it possible. Sometimes, the best valuation is just simple metrics like P/E, P/B or P/FCF. It is never about getting the specific intrinsic value but getting a good estimate or gauge of it.

[paullow]

good points for discussions. personally, i think $1 is already a high price beyond fundamentals. i cannot predict what is in store for bt n i am unable to see how further value can br unlocked at this point in time. safety margin is much much less at this sort of price. moreover, it doesn't pay rich dividends. george is the happiest person in this rise.
imho.

[RBM]

hi rbm,

i am not vested in breadtalk. but out of curiosity, bt seems rather overvalued n way out its fundamental support. if u have vested in it at a low price of 30-50c, why wldn't u take money off the table now?
t/o might not happen anyway n its anyone's guess but what's sure is that paper gains can be converted to real gains and put to work in another undervalued stock.
just my thoughts.
no offence rbm.

Hello Paullow,

Good question and absolutely no offence taken. My average buying price (almost two years ago) was S$ 0.55 per share - and I recently sold about 40% of my holding for S$ 1.13 - my (no-doubt-flawed) logic being that I have ~ 60% of my original holding remaining at not far off zero cost. I'm still hanging on to this ~ 60% for the reasons given above.

I would also point out that OCBC's view is not universally held amongst the analyst group - and as Ray168 points out so very well in his analysis, there are ways of valuing BreadTalk which give much higher share price valuations than the current share price.

Vested

[karlmarx]

In 2008, MINT paid 40mil for a 70% stake in Thai Express. In 2011, it paid 16.8mil for the remaining 30%. Including performance bonuses, Ivan lee pocketed a total of 80mil from the sale of a business that made 9.6mil in FY2010. The group's business includes xin wang, shokudo, and newyork newyork.

It seemed that MINT paid a good price for TE back in 2008; total acquisition cost is a p/e of less than 10. If TE is able to at least maintain its earnings of about 10mil for the next two decades, then MINT will have gotten a very good deal.

I don't know how much TE earns today, but judging just by the apparent lack of (or reduced) customers in its outlets, and higher mall rents, I'm of the opinion that Ivan lee got the better deal by selling out when the business' popularity and profitability was at what appears to be its peak.

One information that could help in assessing BT's prospects is in a breakdown of its same store sales. Unfortunately, I don't think this is available. Are the new stores in china making money to cover the losses in Singapore? Is the earnings supported by the fan fare of new stores, which gradually lose their earning power as time passes? Is that why their profit remained around 10-12mil for the past several years?

On the other hand, there is also the possibility of rising earnings when their expansion slows and depreciation expenses are reduced, as some have pointed out. The flip side is that the rising earnings may eventually come down again if they are unable to maintain that level of same store sales. So again, what are its same store sales?

On a side note,
F&b is a highly competitive business. People's taste are always changing, and their wallets are always sensitive to value given the numerous options available to them. For the owner, this means you can't be on auto-pilot mode and expect your floss buns to still be the craze 10 years later; you always have to be creating/offering something new, and of value, or your customers will go elsewhere. Many small time f&b cafe and restaurant decline because they tasted initial success and stopped innovating e.g. Fish n co, burger king in sg, botak jones. Of course, if you offer great value, you will have no worry for returning customers e.g. numerous hawker fares. The question for would-be long-term investors: can BT (continue to) offer value to customers?

[Ray168]

Alternative view posted >3 months ago...

01-12-2013, 02:53 PM

Post: #43
Ray168
Junior Member

RE: Breadtalk
Hi,

I think we should take another view to value BT. BT is a cash generating machine. Its Net Operating cashflow is improving year after year.

If we take 2011 Net Operating Cashflow $43 million and its total market value $193 million (11Jan2013 @ 0.685 / share), the ROI is 4.48X.

Isn't this attractive?

On TA wise, current price may be too high for entry.

Just sharing my view on BT intrinsic value... which I posted on other forum. Which model is right? Your call.

-------------------------////---------------------------

Base on Earning model, the 'intrinsic value' is $1.22
Parameter:
EPS CAGR (10 yrs) of 22%.
Discounted rate: 3%

** Academic study only **. If you are firm believer of value investing, you will appreciate the model.

......................................................

Base on cashflow "intrinsic value" calculation, the intrinsic value of BT is ~ $2.41

Parameter:
Cashflow grow projection = 6.5%. (50% discount of 5 years CAGR 13%)
Dscount rate = 4%

Compare to current price of $1, the margin of safety is ~60%.

Well, please take above as academic discussion.
It does not take into consideration of overall market sentiment and trend.

p.s. please don't ask me for 'intrinsic value' calculation.

For your first model, I suppose that you use historical CAGR to project future growth rate. However, it is very dangerous to do so without understanding what has allowed the company to grow at 22% per annum and is it be able to do so for the next 10 years. 22% CAGR for 10 years is a very optimistic projection and will make many companies look exceptionally cheap.

As company matures and grow, they will have to slow down eventually. For a retailer/franchisee, it will be either coming from new outlets opening or same store sale growth. If it is to open new outlet without adopting franchise model, you will need to invest cashflow into PPE. In addition, profit margin will also be hit with new store gestation. One good thing about breadtalk though is its negative cash conversion cycle. For franchise, that will be how much capital your franchisee have as well as how much profit your franchisee gets to earn. I doubt breadtalk can achieve 22% cagr just by same store sale growth.

As for your cashflow model, did you use free cash flow or did you use operating cash flow? If you foresee expansion, PPE will be higher and this will affect your FCF. Secondly, is your projection to perpetuity? If it is 6.5% might be too high. Not many businesses are able to grow more than 5% for infinite period.

The dangerous thing about all these model is that your assumption is crucial for your valuation. Try to do a sanity check by asking yourself if it possible. Sometimes, the best valuation is just simple metrics like P/E, P/B or P/FCF. It is never about getting the specific intrinsic value but getting a good estimate or gauge of it.

[wozhaodaole]

if mint is attempting to do a subsequent GO , i think this is the most unusual way to do it.
if i was mint, i would have talked to george first, agree on a price and buy george's stake and then do a GO, similar to what happened with thomson medical.

you don't do a GO by sending signals to the market and causing a rise in the share price.

do you know what is the track record of mint's past acquisitions? are they known to overpay?

Thank you for your question wozhaodaole. Good one - the answer to your question is one of the reasons I have convinced myself to hang onto my BreadTalk shares - I realise I may be wrong.

MINT seems to be a successfull company, certainly in the eyes of its shareholders. Net profit margins exceed 10% and its ROE is ~ 20%. Share price up 77% over the last 12 months (listed on the Bangkok Exchange). Its acquisition business model has clearly lead to high debt levels (e.g. D/E is ~ 1.25) but its operating metrics seem darned good. Its P/E of ~ 25 is actually higher than BreadTalk's P/E based on its last done but it seems to be delivering profitable growth year-on-year - e.g. its dividend has grown 20% p.a. over recent years. About half of MINT's revenue currently emanates from their hotels business, about 40% from their Restaurant business. They have > 80 hotels & resorts, ~ 1,300 restaurants and ~ 200 retail trading outlets. Useless titbit: one of their most substantial shareholders is the Thai King.

During the video I included in my earlier posting, Landi of Investor Central stresses BreadTalk's P/B of > 3. What he did not mention or did not know is that MINT's P/B is >4.5 ......... I wonder about the relevance of the measure in a business such as MINT's/BreadTalk's.

Buying a non-controlling small equity stake in a company doesn't seem to fit with MINT's normal approach. And as MINT's current market cap is ~ S$ 3.8 Bln, about 14 times the current market cap of BreadTalk, I am betting that George Quek may yet receive an offer that he and his better half find compelling. As I said, I may be totally wrong.

Hi RBM,

I feel that even if a substantial shareholder with (supposed) intimate knowledge of a business purchases at a high price, it is still our job as investors to do our objective assessment of the business in order to see if valuations are compelling.

This is because the SSH may have deep pockets or they, being human, may also be wrong.

I cannot comment directly on Bread Talk as I have not looked closely at the business, just making a general comment on SSH.

Thank you Musicwhiz,- no disagreement with what you state but you may want to reflect how your opening one-liner to your posting of 8.27 a.m. this morning could be perceived by those currently vested in BreadTalk. Like a few others, I made my investment into BreadTalk more than a year ago (Q3 2011 in my case). I'm holding on because I believe in the long term growth story of BreadTalk and because I learned a salutory lesson with Harry's Holdings - we all tend to underestimate the value that some acquirers are prepared to place on businesses with a significant customer base.

Vested

[felixleong]

Ya, it makes no sense that they would wanna make a GO when the price has been pushed up so much

[RBM]

Was any forummer at the BreadTalk AGM this morning? Reason I enquire is to learn if anything was said which could explain the ~ 6.5% jump in BreadTalk's share price this afternoon - in decent trading volumes as well (almost 2.3 Million shares changes hands today).

Vested

[Ray168]

Attended BT AGM this morning.

One of the key questions asked was:

Hypotectically, if BT achieve 1000 outlet in 2-3 years time, would Geroege Quek consider to sell the company for gain?

Answer by qoerge Quek : I won't sell the company. Infact, over the last couple of year, there are many big investors want to buy BT, but he decline them all. He does not mind if investor invest into BT.

.....

What does ths means to me?

I interprete that GQ still has lot of passion of BT and he want to continue to build BT. Many venture capitalists are eyeing on BT as they may see the potential value of BT. Given that BT still on aggressive growth plan, it's value may be realize sometime later.

Was any forummer at the BreadTalk AGM this morning? Reason I enquire is to learn if anything was said which could explain the ~ 6.5% jump in BreadTalk's share price this afternoon - in decent trading volumes as well (almost 2.3 Million shares changes hands today).

Vested

[Ray168]

One more important point from CEO Loh is that BT is focusing to improve their operation and set target to achieve 8% net profit from currrent 4%. If this is successfel, IMO it will translate to higher valuation of the company.

Attended BT AGM this morning.

One of the key questions asked was:

Hypotectically, if BT achieve 1000 outlet in 2-3 years time, would Geroege Quek consider to sell the company for gain?

Answer by qoerge Quek : I won't sell the company. Infact, over the last couple of year, there are many big investors want to buy BT, but he decline them all. He does not mind if investor invest into BT.

.....

What does ths means to me?

I interprete that GQ still has lot of passion of BT and he want to continue to build BT. Many venture capitalists are eyeing on BT as they may see the potential value of BT. Given that BT still on aggressive growth plan, it's value may be realize sometime later.

Was any forummer at the BreadTalk AGM this morning? Reason I enquire is to learn if anything was said which could explain the ~ 6.5% jump in BreadTalk's share price this afternoon - in decent trading volumes as well (almost 2.3 Million shares changes hands today).

Vested