OCBC Investment Research downgraded Breadtalk Group to ‘sell’ from ‘hold’ and cut its target price to $0.49 from $0.51, as it expects higher labour costs and rental rates to hurt the bakery and food firm’s earnings.
Breadtalk shares were down 1.67% at $0.59 by 11:40 a.m. They have gained 10.2% since the start of the year, compared to the FTSE ST Consumer Services Index’s 0.1%.
Breadtalk posted a 6% rise in its third-quarter net profit at $3.9 million from a year ago, despite a 21.5% rise in revenue at $116.7 million.
OCBC lowered its 2013 operating and net profit estimates for Breadtalk to $17.6 million and $10.3 million respectively, as regulatory changes for labour have resulted in difficulties in hiring service staff and have had a bigger-than-expected impact.
Breadtalk’s gross profit margin fell to its lowest of 52.3%, compared with an average of mid 54%, OCBC highlighted, adding that “a turning point has potentially emerged given the ultimate limitations on cost savings centralized sourcing and bulk purchasing can bring.”
OCBC advised investors to take profits in Breadtalk at current levels as its valuations are rich given likelihood of depressed margins and the absence of a large dividend payout.
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