Financial Analysis of two companies in the F&B industry

Interpretation of Financial

Statements

Food and Beverage (F&B) Industry

• Food & beverage services comprise establishments engaged in the sale of prepared food and drinks for immediate consumption.

• Integral part of Singapore’s economy

• Caters to local consumption and tourism industry

2008 Key Indicators (F&B Industry)

Background

Information&

SWOT Analysis

BreadTalk Group LtdIntroduction

• Incorporated in 2000• 26 retail outlets island wide• Listed in 2003• IPO shares offered at S$0.24• 32 million shares bought at S$0.30• 189 times subscribed• Signature food items are chicken

and pork floss buns

BreadTalk Group Ltd Introduction

(cont’d)• Bakery: BreadTalk, The Icing Room, Toast

Box• Food Atrium: Food Republic• Restaurant: Din Tai Fung, The Station

Kitchen and Cosmopolitan Cafe• Overseas: China, Malaysia, Indonesia,

Philippines, Korea, Bahrain, Saudi Arabia, Vietnam, Hong Kong, Kuwait, Oman, United Arab Emirates and India

SWOT Analysis

BreadTalk Group Ltd Internal Strengths

• Well-known brand with strong brand equity

• Sleek transparent glass concept kitchen

BreadTalk Group Ltd Internal Strengths

• Wide range of innovative products

BreadTalk Group Ltd Internal Strengths

• Strategic locations• Experienced management

BreadTalk Group Ltd Internal Weaknesses

• Higher rents and failure to renew existing leases

• Dependence on senior management

BreadTalk Group Ltd Internal Weaknesses

• Dependence on major suppliers• Individual kitchen in every outlet

Background

Information &

SWOT Analysis

Old Chang Kee LtdIntroduction

• Incorporated in 2004• Listed in 2008• IPO shares offered at S$0.20• 25 million shares bought at S$0.18• 5.4 times subscribed• 70 retail outlets island wide• Signature food item is Curry ’O

Old Chang Kee LtdIntroduction

(cont’d)• Retail outlets locally: Old Chang

Kee, Take 5 and The Pie Kia Shop• Retail outlets overseas: Chengdu

Eatery• Other services: delivery, catering

and O’ My Darling• Overseas: China, Malaysia,

Indonesia and Philippines

Old Chang Kee Ltd Internal Strengths

Corporate social responsibility Extensive network of retail outlets Diversified customer base

Old Chang Kee Ltd Internal Strengths

Experienced management team High quality standards Promotions

Old Chang Kee Ltd Internal Weaknesses

No risk management committee Labour-intensive business

Old Chang Kee Ltd Internal Weaknesses

Fluctuations in foreign exchange rates

Expansion decisions

BreadTalk Group Ltd & Old Chang Kee Ltd

Opportunities

• Expansion opportunities• Working capital increment

• Increase outlets

BreadTalk Group Ltd & Old Chang Kee Ltd

Threats• Outbreak of food-related

diseases• Strong presence of

competitors

BreadTalk Group Ltd & Old Chang Kee Ltd

Threats

• Changes in consumer response and preferences

• Changes in governmental regulations

Competitors

• Four Leaves• Prima Deli• Polar Puffs & Cakes Pte Ltd• Jollibean• Mr Bean• Any bakeries and food retail

outlets within the vicinity of their retail outlets

Interpretation of Ratios

What makes up revenue?

RevenueGross Profit MarginNet Profit Margin

Extract from BreadTalk’s Financial Statements

Extract from Old Chang Kee’s Financial Statements

Revenue 2008 2007 Change

BreadTalk 212,249,000

156,610,000

35.53%

Old Chang Kee 48,437,000 40,548,000 19.46%

Revenue

Revenue 2008 2007 Change

BreadTalk 212,249,000

156,610,000

35.53%

Old Chang Kee 48,437,000 40,548,000 19.46%

Revenue

Gross Profit Margin

Gross Profit Margin= Gross Profit / Sales

Gross Profit Margin

Gross Profit Margin

2008 2007 Change

BreadTalk 54.39% 55.39% -1 percentage

point

Old Chang Kee 59.61% 58.55% 1.06 percentage

point

Net Profit Margin

Net Income After Tax / Revenue

http://beginnersinvest.about.com/od/incomestatementanalysis/a/net-profit-margin.htm

Extract from BreadTalk’s Financial Statements

Extract from Old Chang Kee’s Financial Statements

Year /Company

2008 2007 Change

BreadTalk 3.94% 5.39% -1.45 percentage

point

Old Chang Kee

4.61% 6.52% -1.91 percentage

point

Net Profit Margin

Cross-Sectional Analysis

• Increase of 35.53% of revenue

• Sales & market diversification strategies

• Grown substantially• Tight rein on expenses

due to economic crisis

• Increase of 19.46% of revenue

• Launched 1st mobile kitchen, O’ My Darling

• Investments have yet to contribute materially

• Future revenue from investments are expected

BreadTalk Old Chang Kee

Cross-Sectional Analysis

• Increase of 35.53% of revenue

• Sales & market diversification strategies

• Grown substantially• Tight rein on expenses

due to economic crisis

• Increase of 19.46% of revenue

• Launched 1st mobile kitchen, O’ My Darling

• Investments have yet to contribute materially

• Future revenue from investments are expected

BreadTalk Old Chang Kee

Analysis - Are the Profits of BreadTalk adequate and

sustainable?• Yes, profits are adequate and

sustainable well into future• Well-prepared to face challenges in then

future economy• Secured 2 franchise agreements • Likely to attract more F&B collaborations • Able to generate more revenues in the

near future

Fixed Asset Turnover

= Sales / Net Fixed Asset Balance

Extract from BreadTalk’s Financial Statements

Extract from Old Chang Kee’s Financial Statements

Year/Company 2008 2007

BreadTalk 3.65 3.49

Old Chang Kee 4.32 4.33

Fixed Asset Turnover

Cross-Sectional Analysis

• Analysis of ratio• Expansion opportunity

with increasing popularity of bread product of Asia

• Note 10 to financial statement

• More sales will be generated in the future

• Analysis of ratio• Increase and

refurbished local outlets, like Take 5!

• Note 11 to financial statement

• Perform better than BreadTalk

BreadTalk Old Chang Kee

Cross-Sectional Analysis

• Analysis of ratio• Expansion opportunity

with increasing popularity of bread product of Asia

• Note 10 to financial statement

• More sales will be generated in the future

• Analysis of ratio• Increase and

refurbished local outlets, like Take 5!

• Note 11 to financial statement

• Perform better than BreadTalk

BreadTalk Old Chang Kee

Is BreadTalk investing enough to safeguard future profitability?

• Yes• The company has put much money in

investing fixed assets • The fixed assets were effectively utilized

to generate more income.

Debt-Equity Ratios

= Total Liabilities / Shareholder’s Equity

Extract from BreadTalk’s Financial Statements

Extract from Old Chang Kee’s Financial Statements

Year/Company 2008 2007

BreadTalk 1.62 1.45

Old Chang Kee 0.55 0.88

Debt-Equity Ratios

Interest Coverage

= (Earnings before interest and tax) / Interest expense

Extract from BreadTalk’s Financial Statements

Extract from Old Chang Kee’s Financial Statements

Year/Company 2008 2007

BreadTalk 15.10 13.39

Old Chang Kee 17.90 53.04

Interest Coverage

Cross-Sectional Analysis

• Debt-equity ratio• Interest coverage

BreadTalk and OCK

Cross-Sectional Analysis

BreadTalk and OCK

• Debt-equity ratio• Interest coverage

• Yes.• Increase in debt-equity ratio -> more

aggressive financing and more probability resulting in volatile earnings.

• Increase in interest coverage -> investors will be more confident that they would be able to meet interest obligations.

Analysis - Are the finances of the company sensibly and effectively

structured?

Interpretation of Ratios

(cont’d)

BreadTalk

BreadTalk

Old Chang Kee

Old Chang Kee

NET WORKING CAPITAL

2008 2007

BreadTalk -5,518 -3,907

Old Chang Kee 5,319 1,298

CURRENT RATIO

2008 2007 Change

BreadTalk 0.93 0.94 - 0.1

Old Chang Kee 1.79 1.21 0.58

NET WORKING CAPITAL & CURRENT RATIO

BreadTalk• Current liabilities >

current assets• May seem that they

are not able to pay debts when due

• Intercompany loans for financing

Old Chang Kee• Ideal balance

between assets and liabilities

• Able to pay liabilities when they fall due

QUICK RATIO

BreadTalk• Did not invest too

much on stocks and prepayments

Old Chang Kee• Ideal balance between

assets and liabilities• Able to pay liabilities

when they fall due in the short term

2008 2007 Change

BreadTalk 0.86 0.87 - 0.1

Old Chang Kee 1.61 1.03 0.58

ACCOUNTS RECEIVABLE TURNOVER

2008 2007 Change

BreadTalk 44.58 51.74 -7.16

Old Chang Kee 96.11 67.36 28.75

BreadTalk• Relaxed credit

standards

Old Chang Kee• Tightened credit

policies

INVENTORY TURNOVER

2008 2007 Change

BreadTalk 24.66 27.88 - 3.22

Old Chang Kee 26.12 31.47 - 5.35

BreadTalk• Might be due to

stock obsolescence• Food wastage

Old Chang Kee• Similar to BreadTalk

Is the company managing its liquidity position well, will it be able to sustain its operations in the short and medium term?

Yes!• Using intercompany loans to finance liabilities in

short term.• Majority of current assets are receivables and

cash• More expansion plans overseas and locally

Earnings Per Share

EARNINGS PER SHARE

BreadTalk• Favourable and

attractive• Advantage over

constant expansion plans

Old Chang Kee• Significant decrease• 25m shares issued

by the Group

2008 2007 Change

BreadTalk 3.31 3.23 0.08

Old Chang Kee 2.42 3.87 -1.45

PRICE EARNING (P/E) RATIO

BreadTalk• Investors are paying 20 times

more• Different investors have their

own opinions

Old Chang Kee• Bigger change compared to

BreadTalk• Still lower than BreadTalk and

less attractive

2008 2007 Change

BreadTalk 22.19 21.98 0.21

Old Chang Kee 9.71 6.07 3.64

DIVIDEND YIELD

BreadTalk• Share prices

decreased though dividend per ordinary share constant

Old Chang Kee• No dividends paid in

year 2008• Reserve cash for

funding of future overseas expansions

2008 2007 Change

BreadTalk 9.86 8.45 13.31

Old Chang Kee 0.00 77.77 -77.77

NET ASSET BACKING PER SHARE

Old Chang Kee

BreadTalk

NET ASSET BACKING PER SHARE

BreadTalk• Increase in value of

shares

Old Chang Kee• Worth of share

higher due to increase in cash and bank balances

2008 2007 Change

BreadTalk 17.14 13.84 3.30

Old Chang Kee 22.35 18.77 3.58

PRICE-BOOK (P/B) RATIO

BreadTalk• Larger decrease than

OCK• Ratio still maintained

at >1

Old Chang Kee• Not a significant

change when compared to BreadTalk and ratio still close to 1

2008 2007 Change

BreadTalk 4.12 5.00 -0.88

Old Chang Kee 1.07 1.23 -0.16

IS THE CURRENT STOCK PRICE ATTRACTIVE FOR INVESTORS?

Yes!• Ability to bounce back during financial

crisis• Current and potential investors are

confident in BreadTalk’s good prospects• Attractive returns

LIMITATIONS

• Comparison for both BreadTalk and Old Chang Kee may be different in terms of size of enterprise as BreadTalk has other investments such as restaurants and food courts while Old Chang Kee does not.

• Non-quantifiable items, which could have aided in a comprehensive analysis, not reflected in financial statements such as efficiency and effectiveness of the company’s management.

• 31st December year end for both companies may not represent the position of both companies for whole year from January to December

ASSUMPTIONS

• For share prices, we took the share price at current

day (20 January 2010) for a more realistic calculation

• Ending trade debtors were used instead of average

debtors

• Components such as discounts allowed and discount

received was not disclosed so it was not included in

the computation of inventory and accounts

receivable turnover.

CONCLUSION

• Sustainability– Potential collaboration with other companies

in the industry– Secured 2 franchise agreements

• Enough investments to safeguard future profitability– Effective utilisation of fixed assets– Refurbishment of outlets

BREADTALK

CONCLUSION

• Finance of company– Borrowings are significant but Directors’

have assured that the company will be able to pay

• Liquidity position management– Cash not tied up in stocks and

prepayments

• Attractive stock prices– Steady increase in share prices

BREADTALK

Citations• http://beginnersinvest.about.com/od/incomes

tatementanalysis/a/net-profit-margin.htm• http://breadtalk.listedcompany.com/sharehol

ders.html

• http://www.oldchangkee.com/ • http://oldchangkee.listedcompany.com/financ

ial_ratios.html

• http://uk.reuters.com/business/quotes/chart?symbol=BRET.SI

• http://uk.reuters.com/business/quotes/chart?symbol=OCKL.SI

• http://liberta.co.za/blog/what-is-net-worth/