BreadTalk

BreadTalk’s 1Q10 net profit (-64% yoy) fell short of our house expectations, mainly due to the underperformance of its PRC food court operations, start-up costs and high tax rates. However, its bakery segment stays robust as EBIT grew 33% yoy. Looking ahead, we expect the restaurant business to recover in the next 12 mths when Ramen Play and Carl’s Junior start to contribute. In addition, the co is streamlining of its China food courts & net store expansions to enhance operating efficiencies.

The group is in a net cash position of $28m and continues to generate healthy operating cash flow. Our analyst has cut the earnings estimates by 17% for FY10 to factor in the weak 1Q10 and higher start-up costs. Accordingly, the TP is reduced from $1.04 to $0.70. In terms of valuation, the stock currently trades at about 12.7x Fy10 and 10.8x FY11 P/E.