Breadtalk reported a 5% yoy increase in 2H08 net profit on a 37% revenue growth. Full year net profit of $7.7m was below our expectation mainly due to an impairment charge of $0.9m on the investment in Out of the Box Pte Ltd and fixed assets of a restaurant, as well as start up losses of $1.6m of J Co. Donuts and Carl’s Jr business. Excluding these charges, core businesses would have performed to our expectation.

The restaurant business’s operating profit declined 34.8% yoy mainly due to higher operating loss from Cosmopolitan Café and Station Kitchen, as well as start-up cost of Carls Jr restaurants. However, the start up losses of Carls Jr is expected to ease as operating efficiencies improved along with more store additions. The group plans to add at least 3 Carls Jr restaurants at strategic locations in first-tier cities of China in FY09.

Resilient performance from the existing F&B business has been able to offset the start up losses from new business franchises. Its bakery and food court operations recorded double-digit growth, while its margins excluding impairment and start up costs showed progressive improvement. Going forward, the group will continue to expand with focus on the China market, albeit at a more cautious pace. It plans to add 120 bakeries, 6 food courts and at least 1 restaurant in FY09.

The group declared a first and final dividend of 1 cent per share, representing 30% of its dividend payout. The higher dividend payout compared to prior years reflects the group’s confidence in itsfinancial strength to weather the downturn. Indeed, its cash position has been strengthening as evident in its positive operating cash flow of $32.7m and improved net cash position from $26m to $31m in FY08.

We have reduced our FY09 and FY10 earnings estimates by 15-18% to reflect weaker operating margins underpinned by on-going store expansions. Our target price is reduced to $0.53 based on our STOP valuation. We believe the stock will continue to outperform in the recessionary climate, driven by its steadily growing consumer staple food business. Maintain Buy.