Breadtalk’s 1Q09 earnings turned around to a profit of $2.1m from $0.3m loss in 1Q08. Results met our expectations. Operating profit almost tripled driven by broad-based double-digit revenue growth across all business and geographical segments despite the severe recession. The successful turned around of its Hong Kong food court business and the disposal of loss-making J Co. Donuts business lifted its profits.

The overall bakery business recorded an operating profit of $1m largely due to the turnaround of the Singapore bakery operations and lower raw material costs. The restaurants’ operating profits were slightly lower yoy at $0.6m due to an impairment loss at the Station Kitchen and start-up cost for the Carl’s Junior business. Operating profits from food courts surged 3 fold to $1.3m led by the turnaround in the Hong Kong food courts. Its retail network continues to grow along with new store additions.

The improvement in its operating margins from 1.8% to 5.7% reflects better cost efficiencies through its cost management program and enlarged network. Savings were achieved in certain head office costs. Distribution and selling expenses and administrative expenses are well contained at 51% of revenue, an improvement from 54% a year ago.

Robust revenue was recorded across all geographical segments including the PRC (+34%), Hong Kong (+100%) and Singapore (+13%). Further, the group has recently awarded the Middle East Master Franchise to Pan Arabian Gourmet based in Bahrain. An opportunity to work with the Middle East market affirms the strong brand recognition in ‘BreadTalk’. The Middle East presents tremendous opportunities that will bring the group’s F&B presence to a global scale.

Breadtalk has proven once again that its good mix of F&B offerings supports its strong value proposition of being resilient under challenging business climate. Moreover, the stock has good growth prospects over the long haul underpinned by its F&B network expansion across the regions. Maintain BUY at a higher SOTP target price of $0.60 (implied FY09 PER of 16x).