Investment Essay on Breadtalk

Topics: Stock market, Cash flow, Financial ratios Pages: 45 (10073 words) Published: August 31, 2013
Executive Summary
BreadTalk Group Ltd is a Singapore-based Food and Beverage operator that was founded in 2000 and was listed on the Singapore Exchange (SGX) in year 2003. The entire business revenue is segmented into four categories namely, Bakery, Restaurants, Food Atriums and Franchise. The objective of this report is to assess BreadTalk's current position and future prospects through a series of valuation models. The key competitors of BreadTalk are namely Auric Pacific Group and Food Junction Holdings Ltd. We have used the Michael Porter Five Forces to help us understand the BreadTalk's position in the market industry. We have also examined the current issues and problems faced by BreadTalk to see how it would affect the progress and growth of BreadTalk. BreadTalk's net revenue has increased by 133.64% from FY 2007 to FY 2011 owing to microeconomics and macroeconomics factors. The Earnings before Interest and Tax (EBIT) indicates that BreadTalk has increased its operating profits by 47.59%. Based on the DuPont's ROE, BreadTalk has seen a consistent performance; generating a stable return to their investors as compared to its key competitors, Auric Pacific Group and Food Junction Holdings Ltd. Our valuation analysis for the four valuation models are as follows:     DDM: Overvalued FCFE: Undervalued P/E: Overvalued P/BV: Overvalued

The Dividend Discount Model (DDM) is our preferred valuation model because it provides a way to value stocks based on the dividends that the company pays. BreadTalk has been issuing annual dividends consistently and we believe that it will continue to do so. Also, the simplicity of this method provides a clean and accurate calculation. The FCFE growth rate of BreadTalk is difficult to predict due to its existence in the highly competitive Food and Beverage industry. This has an impact on the intrinsic value of BreadTalk which is sensitive and requires forecasting to the highest degree of estimation, resulting it to be less preferred. The Price/Earnings Ratio model (P/E ratio) and Price/Book Value Ratio (P/B ratio) are less preferred as they do not provide insights on the stock's intrinsic value and therefore the DDM is deemed to be a more accurate valuation model.

Contents
1 Company Background ........................................................................................................................... 4 1.1 1.2 2 Ownership Structure ..................................................................................................................... 5 BreadTalk Share Price Performance ............................................................................................. 6

Michael Porters Five Forces. ................................................................................................................. 8 2.1 2.2 2.3 2.4 2.5 Intensity of Rivalry ........................................................................................................................ 8 Bargaining Power of Suppliers ...................................................................................................... 9 Threats of New Entrants ............................................................................................................... 9 Threat of Substitutes................................................................................................................... 10 Bargaining Power of Buyers ........................................................................................................ 10

3

Strategic Issues Identified ................................................................................................................... 11 3.1 3.2 3.3 3.4 Commodity Price Fluctuation ..................................................................................................... 11 Market with Intense Competition and Product Differentiation ................................................. 11 Quality of Bakery Products...
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