Can BreadTalk Group Limited Sustain Its Dividend Payment?
BreadTalk Group Limited (SGX: CTN) was founded as a bakery brand in 2000 but has expanded over the years to become a large food and beverage group. It has 1,000 retail stores across 16 countries and owns brands such as BreadTalk, Toast Box, Food Republic, Bread Society, and So Ramen.
The group has been expanding aggressively in recent years to capture more market share overseas and has also partnered with other food brands (such as Wu Pao Chun and Song Fa Bak Kut Teh) to introduce new food concepts as part of its stable of brands. With increased capital requirements for such investments, as well as higher operating expenses as a result of having more brands to manage, investors may be wondering if BreadTalk can sustain its dividend payments.
The table above shows the free cash flow (FCF) trend for BreadTalk, and a big positive in the numbers is that the group has managed to generate consistent FCF every year for the last five years. For FY 2018, FCF was at a five-year low of S$17.7 million due to higher capital expenditure (capex) requirements.
Investors should note that BreadTalk has consistently generated operating cash flow of around S$60 million to S$70 million per year, and I believe this level can be sustained moving forward. However, if the group ramps up on capex, FCF may dip even further in future years.
Historical dividend trend
BreadTalk has a history of paying consistent dividends, though the level has fluctuated rather wildly over the last three fiscal years. Note that the numbers in the table have been adjusted for the 2-for-1 stock split the group announced in mid-2018. It declared and paid special dividends in FY 2016 and 2017, but dividends were then drastically slashed in 2018 as earnings came under pressure (a year-on-year fall of 30%). The dividend payout ratio for 2018 was around 55%.
Business expansion initiatives
BreadTalk has not been standing still. In January this year, the group announced the opening of a new Song Fa restaurant in Beijing China. This is the fourth restaurant opened after BreadTalk and Song Fa signed a joint venture agreement in July 2017. In May, the group entered into a franchise agreement with Song Fa to introduce the brand into the Taiwanese market. And in June, BreadTalk opened its third Wu Pao Chun Bakery in Singapore after opening two stores in Shanghai, China.
The group has also established a new S$500 million multicurrency medium-term note programme in April 2019. These funds will be tapped for use in organic and inorganic growth initiatives, which may further raise the group’s gross debt level. Gross debt for the group stood at S$222.4 million as of 30 June 2019, while net debt was S$94.2 million.
Possibility of a further reduction in dividends
With the reduction in FCF and the decline in profit witnessed for FY 2018, along with BreadTalk’s aggressive and ambitious expansion plans, there seems to be a possibility of a further reduction in dividends as the group may wish to conserve more cash for growth. This is even though the group has maintained its interim dividend at 0.5 Singapore cents in its recent Q2 2019 earnings report.
Should BreadTalk tap its medium-term note programme, gross debt may increase significantly, which will translate to higher finance costs. This could lead to an even further reduction in dividends for future years.