Should Investors be worried about BreadTalk’s Soya Bean Saga?

breadtalk

breadtalk buns

Ouch, I have been drinking Yeo’s soya bean? Should Breadtalk’s investors be worried about soya bean saga?

Earlier this year, Breadtalk came under fire for its commemorative bun “Lee bu kai ni” which was seen by public as bad taste and a poor marketing gimmick taking advantage of the passing of founding father Lee Kuan Yew. What was less known was that Mr. Lee was an idol of George Quek, Chairman of Breadtalk and was deeply apologetic for the decision.

But yet again, Breadtalk came under public’s highlight again for a second time this year for using Yeo’s packaged soya bean and passing it off as “fresh soya bean”. It was serious enough for Mr Seah Seng Choon of CASE to label the action as “improper and misleading” and almost certainly enough to piss their loyal customers off. Charging $1.80 for 350ml of Yeo’s soya bean when you could purchase a litre at $1.50 from FairPrice? That’s a whopping 240% gross margin for repackaging business! Unlike the previous incident which some can forgive as innocent mistake, this is an outright deception and is likely to have some implications on sales for the short-term.

lky bun

Should BreadTalk investors be worried about the incident?

It is difficult for anyone to predict the magnitude of the sales drop and the potential length of the sales damage caused by the event. What is certain is the branding of Breadtalk took a hit and likely to trickle down to the bottom line at least for this quarter. Over the past 2 days, BreadTalk share price dropped by just 3.3%, not a particularly large movement. It seems like shareholders are not too concerned with incident and probably will not have any significant impact on the earnings. Even if this incident has a serious dent on BreadTalk actual sales, it is not likely to have much impact on the the BreadTalk Group itself. Here are the reasons why.

 

#1 Singapore only accounts for 14% of total outlets globally

Despite being a home-grown brand, Breadtalk has successfully broken into international markets, especially China and is now the key revenue driver of BreadTalk group. In fact, the company is scaling down its less profitable operation in Singapore due to rising rental and labour cost. Even if Singapore’s sales is badly affected, it will remain muted due to the scale of the BreadTalk. Global customers are unlikely to care much about the misrepresentation in Singapore’s outlets.

breadtalk distribution of outlets

Source: Annual Report 2014

 

#2 BreadTalk makes more money from restaurants than bakeries

Bakery business accounts for 49.9% of total revenue of BreadTalk. However, restaurant operations account for 46% of profit for the company! BreadTalk’s restaurant include RamenPlay, Sanpoutei Ramen and their crown jewel Din Tai Fung. While just accounting for just 22.2% of the revenue, the restaurant division is generating huge profits for the company. Majority of consumers do not relate Din Tai Fung to BreadTalk when dining, limiting the damage of this scandal. Investors should be much more concerned if food scandal breaks out at Din Tai Fung than a scandal at BreadTalk bakery.

 

 

breadtalk profit distribution

Source: Annual Report 2014

 

#3 BreadTalk financials are solid

BreadTalk’s operating cash flow is $73.3m in 2014. That means it is generating $73m of cash from its business every year.  Its actual profit is $12.1m. Part of the reason is the aggressive depreciation on BreadTalk’s assets which reduces its underlying profit. A full blown scandal can cripple small food operators, especially food poisoning scandals. But for BreadTalk, it can probably weather through even the toughest conditions with its financial prowess.

stockflock breadtalk cashflow

Source: http://www.stockflock.co/company/5da

For BreadTalk’s investors, a more worrying concern will be rapidly rising labour cost in Singapore, crimping down Din Tai Fung’s profit margin and challenging conditions in China’s F&B market that might limit its growth potential overseas.

 

Too bad the soya bean scandal didn’t generate a very compelling share price to be excited about.

 

This guest post is written by Wilson Ong, Co-Founder of Stockflock.co. Stockflock provides charts and information on listed companies in Singapore. Log on to Stockflock for free information on your stocks!

 

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