Finance and Investment : Question and Answer

Running head: FINANCE AND INVESTMENT
Finance and Investment
Name of the Student:
Name of the University:
Author Note

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Table of Contents
Answer to Part 1.........................................................................................................................2
Answer to Question 1.............................................................................................................2
Answer to Question 2.............................................................................................................6
Answer to Question 3.............................................................................................................7
Macro Level Analysis............................................................................................................7
Government regulation.......................................................................................................7
Industry growth..................................................................................................................8
Industry income..................................................................................................................8
Inflation rates.....................................................................................................................9
Interest rates.....................................................................................................................10
Micro Level Analysis...........................................................................................................10
Market competition and goal...........................................................................................10
Debt position and operation.............................................................................................11
Answer to Question 4...........................................................................................................13
Answer to Part 2.......................................................................................................................16
Reference list............................................................................................................................23

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Answer to Part 1
Answer to Question 1
History
The bread-talk company was founded 19 years ago in 2000 when the founding
chairman developed the seed idea to sell breads and buns which were attractive and showed
creativity to make. The first store was opened in Parco Bugis Junction in July 2000 and the
second store in Novena square in the year 2000. It got listed in 2003 on the Singapore Stock
Exchange SGX. The headquarters of the company is in Singapore, and it has expanded to
become a global bakery brand across the globe. Due to various expansion opportunity the
headquarters of bread-talk company was shifted to KA Food-Link, in the year 2001. The
production capacity and increase in space and machinery happened in the year 2002. In
2015, there was a controversy raised against the quality of milk supplied by them (Martins,
Pinho and Ferreira 2017). They had also been accused of selling expired ingredients food but
it did not have any proven claims.
Analysis of stock price due to announcements:
The Bread-talk Company is a global company involved in the bakery industry and
supplying quality bakery products and beverages around the globe through various chains and
brands of outlets. The company is very much involved in delivering quality products to its
consumers to create brand recognition and sustainability. Since it operates its business under
various brands and chain of restaurants any news and announcements pertaining sensitive
information regarding to the company has an impact on the share price. Dr George Quek
Mneg Tong is the chairman of the company. The revenue generated amounts to SG$297.4
million till 2018. It provides employment opportunities to more than 6,900 employees. The
bakery group has its owned group of network for the bakery outlets in various parts of the

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world like PRC, Hong Kong, Malaysia. It also has the setup of franchise outlets across
Middle East and Asia. Bread Talk also made efforts to consolidate as well as improve the
underperforming stores in Singapore and China in the previous year. It has opened two
outlets in 2018, one at Thonglor in Bangkok and another at Northpoint City in Singapore.
The company aims to provide its customers with finest mix of culinary skills that involves a
variety of tastes. They have their own Research and Development team that looks after the
demands and feedback of its customers. The team presents different dishes every few months
ranging from local desserts to delicious dumplings and pastries.
In the year 2017 the company paid around dividend of 7 cents per share which
included final dividend and also special and interim dividend, this news of dividend payment
have an effect on the share price (Hail, Tahoun and Wang 2014). The share price starts to rise
on the date of announcement of dividend and falls just before the last date or the ex- dividend
date. Thus this factor has an effect on the financial performance of the company.
As it is evident from the financial ratio of the company it is seen that overall the
company has improved its gross performance but the net performance was poor due to factors
like increase in tax rate (Gamayuni 2015). The company entered into joint venture
agreements for the procurement of raw materials with a Japanese company. Thus this
significantly affects the cost of raw materials and thus the overall production cost of the
company, and ultimately it affects the margin of profit for the company (Pagotto and Halog
2016). Thus this news has an effect on the stock price of the company as this news is deemed
material and important announcement for the company. Bread-talk entered into Myanmar a
new country and thus wanted to expand business into new territories. This news is taken as a
positive news by the market and has a positive impact on share price.

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In 2018 the company expanded its operation using the 4orth brand group, which is
focussed in expanding the company business into new territories. The company entered into
various joint venture agreements for its acquiring of raw material as well as increasing
efficiency in production and distribution channel. The company has entered into various
agreements with various infrastructure providing companies to implement its expansion
policy with a strong and a rigid support (Swink and Schoenherr 2015). Thus any news of
procurement of servicers from external sources for increasing efficiency creates a positive
impact on the company and also on its share price as it will lead to increase in sales and
revenue for the company due to improved brand recognition.
Financial performance based on Revenue strategy:
Bread-talk being a pioneer in bakery innovation and baked products produces bakery
goods which are exquisite to its own bakery. The company employs various revenue strategy
and company strategy for the selling of its products. The company sponsors various cultural
events and introduces a special food product which is going to be available during that event.
Thus it creates a unique product which appeals the masses and they create a brand image. The
company sponsored an event in 2018 pertaining to the Singapore national day parade and
made a local product known as the golden lava floss and almost 120000 pieces of this product
were sold during that time period (Kim 2016). Also it produced a special crab muffin cake
and almost more than 11000 pieces were sold in its inaugural week.
Technology has the greatest impact on the modern day business as every consumer is
involved and affected by the technological innovation. Due to this factor the company is
involved in innovating its app and enter into agreements and bring out various offers for its
consumers. The company entered into an agreement with the grab pay company to bring
about loyalty offers for its consumers. They can avail cashbacks and discount offers on the

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company produce. Thus this strategy helps in retaining consumers and attract them and thus
ultimately enhance their revenue. The company launched a new app which was downloaded
more than 20000 times in the 4 month period of its launch. The company also has started an
offer where with purchase of any beverages the consumers can purchase a golden flask at
only 1$. Also they can avail a discount of 10% in a month from their last purchase, at any
brands and outlets affiliated to the company. Also the company offers 10% discount if the
consumers bring their own flask to the outlet during the purchase of any beverages. Thus the
company is also focused on reducing the cost of production by acquiring raw materials at a
reasonable cost. For this purpose the company is entering into various agreements with other
suppliers for cost efficiency (Chen, Wang and Qiao 2014). Thus the company is involved in
enhancing revenue as well as cost reduction strategy for its benefits. The credits for the
strategy of maximisation and consolidation has been given to the group that supported the
divisions in focusing on improving the current outlet portfolio mix.
Products and Services
Toast Box, Bread Society, The Icing Room, Food Republic, So Ramen , Thye Moh
Chan are some of its portfolio brands, while Nayuki Tai Gai, Din Tai Fung, Wu Pao Chun
Bakery, and Song Fa Bak Kut Teh are its Partner brands. These are some of the brands of its
portfolio of twelve brands. It has more than 850 stores at different locations around the globe.
The group has made the use of daily staples a healthy and a tasty statement for the
consumers. Thus creating a new way of eating habits among the consumers. The group has a
research and development team which is involved in creating delicious and tasty pastries,
desserts and local cuisines which are appealing to the general public. Every few months the
breadtalk company introduces new products in the market. The company has a vast network
of suppliers, and business logistics to send extereme good quality pastries and desserts to the
different stores. Also the chairman of the bread-talk company is an expert in the beverage and

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food industry and thus providing necessary expertise in the company. The famous products of
breadtalk which are the bestseller in breads are Sausage standard, Cheese Sausage, cheese
boat along with smart aleck and many more breads. Also the snow roll in the cake section of
the bread talk company is one of a kind and unique product which is produced only by this
company across the globe.
Answer to Question 2
Peer Company Analysis:
The company faces direct competition from the company Four Leaves. The company
is based in Singapore and operates a chain of around 40 stores in Singapore and makes a
direct competitor to the company bread-talk. The company is involved in providing exclusive
food products which is manufactured using up to date Japanese technology. The company
was formed in 1981 and has expanded ever since to various location across Singapore. Like
Bread talk Company operates its business under various brand names, the four leaves also
operates under various brand names and has an expanding consumer base. Since Bread talk
as a company operates and expands around the globe the four leaves is focused on expanding
and concretizing its business in Singapore. There is a direct competition between four leaves
and Bread talk in the Singapore market. The overall profit of four leaves in Singapore was
around 38.6 million us dollars while on a whole basis Bread talk had a profit of around 152.3
million dollars but if taken on a standalone basis for Singapore it comes to around 44 million
dollars. Thus it is a direct threat to Bread talk.
Bread talk is having financials which is way less than the industry average. All the
profitability ratio of Bread talk is way less than the median industry average making its
fundamentals in comparison to the industry a poor candidate. Along with the profitability
ratio, the liquidity ratio of the company is way below the standard level, raising question over

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the company ability to meet its short term liabilities. Although the asset turnover ratio of the
company was good but all other ratio of the company of the earning power is poor, thus the
overall expansion policy of the company is not in its favour. The overall debt level of the
company is greater than the industry median thus the company has taken a lot of financial
leverage. Thus the quality of financial position of the company is also in a poor state than the
industry. Thus the overall the quality of the company is in a poor state but it has a various
brand of opportunities also available to improve upon its revenue and sales. Thus the
company is in a poor state of affairs which can be revived and the company can show better
performance than its peers in the future.
Answer to Question 3
Macro Level Analysis
Bread Talk group limited is beverage and Food Corporation of Singapore, which has
its franchises outside of Singapore. The income, growth and government regulations of the
food and beverage industry influenced the growth of the Bread Talk group significantly (Lee
et al. 2016).
Government regulation
The influence of government rules and regulations on any industry is huge. The food
and beverage industry of Singapore is regulated by the government to control territorial and
institutional factors to maintain the viability and growth of the industry. The regulatory act of
government to prevent foodborne illnesses, create difficulties for the food and beverage
industry (Giap, Sasidaran and Anuja 2017). To ensure safety of food products government of
Singapore conducted a hazard analysis, established critical limits, put monitoring procedures
and identified critical control points (Lee et al. 2016). Bread Talk group faced many
challenges to maintain the restrictions imposed by the government.

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Industry growth
Thus, these restrictions influenced the growth and development of Bread Talk. Trade
restrictions and tariff policies imposed the industry affected the domestic and overseas
business of the company. Political stability and economic development are co-related terms
(Koh 2019). The stable political system helped in economic development and growth of the
country. The political stability and government regulations attracts the foreign direct
investment and proper environment for the business. The political stability of Singapore
pushed the growth of the company and facilitated to expand its business outside of the
country.
Figure: Revenue growth of food and beverage industry of Singapore
Source: (Satista 2019)
Industry income
In 2019, the revenue in the food and beverages industry of Singapore amounts to
US$366 million. The expected annual growth rate of revenue amounts to 20.2% by 2023 in
the food industry. The generation of revenue of the industry is greater in China compared to
other countries of the world, which is at US$22,102 million in 2019. The large market of the

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China helped the companies to get more customer base and grow the profitability. The
market volume of the industry will increase to US$765 million by 2023 (Rajaram 2014).
Even, there is growth in user penetration and it 26.3% in 2019 (Dhaliwal et al. 2016). The
expected user penetration will hit 31.1% by 2023. The growth of industry helped the
company to expand its business and earn greater profitability. As a result, the business of the
Bread Talk group also expanded and the net sale of the company spiked to S$609.8 million in
2018. The revenue generation of the company hiked to S$609.8 million in 2018.
Inflation rates
The change in price of services and goods for a time period is known as inflation. The
inflation rate of a country is a key economic indicator of growth. The role of inflation rate is
important, as it affects the analysis of macroeconomic indicators. The inflation rate of
Singapore declared by the Monetary Authority of Singapore, which is the central bank of
Singapore.
Figure: Interest rate of Singapore over the past five year
Source: (Tradingeconomics.com, 2019)

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The inflation rate of Singapore was remarkably low in 2016. The inflation rate of Singapore
decreased at slower pace from 2017 onwards. Though, for the last three months food inflation
of Singapore was steady. In July 2019, the annual inflation rate decreased to 0.4%, whereas it
was 0.6% in June 2019.
Interest rates
The effect of interest rates on the business of Breadtalk is significant. The business
will be at risk if the interest rate of the country fluctuates. The central bank of Singapore
decides and controls the interest rate for the economy, which helps in business growth. Last
recorded interest rate of Singapore was 1.74%. The interest rate of the country increased at a
faster pace. Interest rate of past five years represented in the graph.
Figure: Average overnight interest rate of Singapore
Source: (Tradingeconomics.com, 2019)
Micro Level Analysis
Market competition and goal
The operation of the Bread Talk Grourp limited helps to create highest level of
efficiency possible within the organization. The profit of the organization maximized due to

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efficient use of resources. The company took a lot of efforts to expand its business in the food
and beverage market of Singapore as well as the world (Giap, Nurina and Mulya 2015).
Though, the earnings of the organization will remain flat in the near future. The long term
growth startegy of the company need a strong foundation for a sustainable growth. To sustain
in the highly competitve market of Singapore and to spread its business globally, the
company is focusing on levarging technology.
Debt position and operation
The use of technology will improve the cost mannagement and operational
efficeiency of the company. It will also faciliate the brand expansion into new and existing
markets (Tan, Woo and Tan 2014). The cash and cash equivalents of the BreadTalk improved
and it was S$ 141 million in 2017. The repayment of loans, investing activity and dividends
of the organization increased the current liabilities to S$316 million from S$257 million.
However, with a net debt of S$51 million in 2018 the company has a healthy balance sheet
(Rahadi 2016). As the resouces are limited in the country, the companies of Signapore mainly
depends on the imported inputs. The biggest player in the food and beverage industry of the
Signapore is Fraser and Neave Ltd. The organization operates in the brewery, food, dairy
sectors and soft drinks.

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Figure: Net debt position of Breadtalk
Source: (www.gov.sg 2019)
The sales of the company is over US$4 billion. BreadTalk faced many challenges and
threats due to the competition in the market. The dymanic structure of the market along with
integration of world market, incresed the competition domestic and foreign organizations.
The organization need to take proper marketing and product diversification strategy, invest in
technological innovation and infrastructure. Reasearch and development plays a vital role in
the technology and innivation. Large portion of food and beverages industry is occupied by
the leading companies of Signapore such as Fraser and Neave limited (F&N), Singapore
Food Industries (SFI) and Asia Pacific Breweries (APB).

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Figure: Revenue of Breadtalk group
Source: (breadtalk.listedcompany.com 2019)
The bakery division of the company recorded a decrease in revenue from S$147.7
million in second quarter of 2017 to S$148.8 million in second quarter of 2018. The revenue
of the directly operated franchise and stores of the company was lower. Though, the revenue
of the BreadTalk grew in the secong quarter of the 2018 by 0.8% to S$148.8 million. It is
because of the good performance in the section of Food Atrium and Restaurants.
Answer to Question 4
The ROE for the company has been estimated using the DuPont Approach (Mihola,
Kotesovcova and Wawrosz 2016). The 3 step analysis has been done using the Profit Margin,
Total Asset Turnover and Financial Leverage.

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The financial performance of Bread Talk Limited for a period of 5 years has been
evaluated and compared using the ROE, Profit Margin, Total Asset Turnover and Financial
Leverage ratios.

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The Return on Owner’s Equity for Bread Talk has been fluctuating over the years. It
has decreased to 12% from 18% in 2014. The Profit Margin has also seen a fluctuating trend.
It suddenly rose up in 2016 and dropped back in 2018. The Asset Turnover had increased in
2015, post which it again started decreasing. It decreased till 1.05. The Financial Leverage is
the only component that has shown an increase from 2014, this has happened due to the
increase in its total assets (Riantani and Nurzamzam 2015).

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Answer to Part 2
The data of 5 years for Bread talk Group Limited has been taken and the valuation has
been done using the Dividend Discount Model and Price Book Value Ratio Model.
Dividend Discount Model (DDM)
The company has adopted the quantitative mechanism for forecasting the pricing of
shares on the basis of the present day price of its stock and the value of its sum of the future
payments of dividend at the time of discounting. It has attempted to derive the fair value of
the stock without taking into consideration the existing market conditions. It has considered
the variables of dividend pay-out and the expected returns from market. As the derived value
has been greater than the present price of its shares, the shares were undervalued and
qualified for purchase (Irons 2014). The opposite has also seen to be true. Bread Talk
produces goods to earn profits from it. The earnings of cash flow from these activities help to
ascertain the profits that get reflected on its stock price. The shareholders have not been paid
any preferred dividend (Karpavičius 2014). The future value of the asset has helped to
determine its current worth by making use of the interest rate model.
This model takes into consideration the expected cash flow values of the company
and has determined the Net Present Value using the time value of money concept. Bread Talk
operates by taking the summation of the expected future dividends that it is supposed to pay
and calculates the present value by the net interest rate factor. The investors and analysts of
Bread Talk have made assumptions and recognized the trends of past dividend payments to
predict the future dividends (Mugoša and Popović 2015). The growth rate of dividend has
been assumed to be fixed until perpetuity, this indicates a constant flow of identical cash
balances for an indefinite time period having no end to its date.

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The investors in Bread Talk have taken the possible risk of decline in its value and
expect to earn a certain amount of compensation. The cost of equity capital of the firm
represents the reimbursement the investors and the market demands in return for the
ownership of the asset and bearing of the risk (Ng and Rezaee 2015). The rate of return can
be represented by ‘r’ and is calculated using the Dividend Growth Model. Nevertheless, the
rate of return can only be determined after the shares have been sold by the investor (Hunjra
et al. 2014). Most companies that make dividend payments, pay these dividends at a
particular annual rate represented by ‘g’. The ‘r’ and ‘g’ help to determine the effective factor
of discounting. It is represented by (r-g). The growth rate can be determined by multiplying
the retention ratio and the return on equity. The amount of dividends cannot be more than the
earnings of the company as the source of dividends are the earnings itself (Lazzati and
Menichini 2015.). The return rate on the entire stock shall be more than the growth rate of
dividends for the future, else the model of dividends may not sustain.
The net discount rate includes certain assumptions as the variables that have been
used in the formula include the dividend per share. As the growth rate and dividends are the
main components of the formula, the dividend discount model is applicable to the companies
which make regular dividend payments (Khadafi, Heikal and Ummah 2014). It can also be
applied to the stocks that do not make dividend payments using the assumptions of the
dividends that they would have to pay.
The company has several opportunities to earn the return on investment where the
required rate of return is more. To utilize the opportunities, the firm has retained a high
portion of their earnings for the purpose of reinvestment and the earnings grown at a faster
rate. The growth has been more than the cost during the periods of high growth (Berger, Chen
and Li 2018). This has resulted the company in being inconsistent with the assumptions of
dividend discount model at constant growth. Since the company has not paid dividends, it has

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reinvested its capital in the profitable projects and not pay current dividends (Cao et al.
2015). This model is not preferred by most investors as it is difficult to estimate the initiation
of dividends.
The three step model of dividend valuation has been followed for forecasting the
growth in the dividends. There has been fluctuations in the growth rate of dividends. The
slow-moderate growth stage was forecasted a rate of 3%, the high growth stage was
forecasted at 5% and the stable growth stage rate at 1%. The company is adopting strategical
moves to increase its revenue and imporove its performances.

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The forecasted Net Present Value of the share was measured at $2.68 while the
current share price as on Austrlian Stock Exchange was measured at $0.6. This values shows
an undervaluation of the stock.
The sensitivity analysis has been performed using the beta and market risk
premium for the calculation of net present value. The economy has slowly seen to be
fecovering. The table shows the effect of changes in the market risk premium and beta on the
share price. The risk averser investors prefer taking risk in these stocks. The analysis shows
the accuracy of the share price depends on the growth rate forecasted.
Price Book Value Ratio Model (P/B)
Bread Talk has used this for the purpose of its comparison in the market to that of the
book value on dividing the price of its share and the book value of its share. The company
has determined it by combining the asset with the amount of accumulated depreciation. The
book value is commonly called as the net asset value which is calculated by summing up the
total assets and deducting the intangible assets and intangible liabilities from it (Goh et al.
2016). The market value of each share is noted by looking into the share prices quoted in the

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market. The book value per share is obtained by deducting the total asset and the total
liabilities. The obtained value is divided by the shares outstanding.
A low ratio of P/B has indicated the undervaluation of the stock of the company. On
the other hand, it can also be interpreted as something being fundamentally wrong with the
firm. This ratio also helps to understand the amount being over paid after the amount that had
been left post going bankrupt. It is a measure used by investors of the company to detect
potential investments. It measures the market valuation of the company and its relativity to
the book value. It reflects a picture of the value which the participants of market attach to the
equity of a company relative to the book valuation of equity. The book valuation of equity
shows past equity issuances, decreased by share buybacks and dividends and augmented by
losses or profits.
Therefore, classifying it as a good investment. The interpretations vary from one
investor to another. This ratio facilitates comparison of the company’s market value with that
of the book value. The market value is calculated by multiplying the share price of the
company with the number of shares outstanding. The net assets of the company is its book
value. On the other hand, when the company pays off all of its debt and liquidates its assets,
the remaining value is the book value of the company. The ratio gives an insight into the
valuable reality check for the investors who seek the growth at the reasonable price and looks
at it by connecting it to the Return on Equity which is a dependable growth indicator (Ichsani
and Suhardi 2015). The huge differences between the return on equity and price book value
ratio of companies signal a red alert for them. The combination of high price book value ratio
and low return on equity is seen as the growth stocks being overvalued. The return on equity
and price book value ratio should be simultaneously growing (Ng and Rezaee 2015). It is a
useful aid used by Bread Talk to identify a range of general parameters for the price book
value and has taken into consideration different other factors and valuations that interpret the

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value more accurately. They also support in forecasting the potential growth of the company.
This ratio has been seen as a preferred ratio by investors who consider the valuation for
decades. Historically, a value below 1 is considered to be a good value for price book value
valuation by the company. On the other hand, a price book value of under 3 is considered as a
benchmark .
The historical Price Book Value has been divided into smaller parts for easier
calculation. It is calculate by multiplying the return on equity with the payout ratio and with
the sum of one and growth rate (Lee et al. 2015). It is then divided by the difference between
cost of equity and growth rate. Mathematically, representing it-
P
BV = ROE∗Payout Ratio∗( 1+ g )
k ( e )−g
Where, g = growth rate and k(e) = cost of equity
The ratio can also be shown as the multiplication of the PE ratio with the ROE.
P/ B=MV /BV
¿ ( MV
E )∗( E
BV )
¿ ( MV
E )∗ROE
A consistency test can be performed in a situation where the market value is referred
as the value of equity of common stock that is outstanding, the denominator will be the book
value of common equity. On the other hand, if the class of common stock is outstanding more
than 1, the market value of the classes including the non-traded classes need to be factored.

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The Price Book Value Ratio Model has been used to show the results of Bread Talk
Ltd. The pay-out ratio has been calculated from the DuPont ROE and Retention ratio. The
growth rate and historical price book value have been calculated.
A peer analysis has been done for Bread Talk and its competitors Jumbo Group
Limited and Japan Food Holding Limited. Jumbo Group has not given out dividends due to
which its ratio has been zero earlier. From 2017 it started giving dividends and the ratio
gradually improved over the passing years. On comparing Bread Talk and Japan Food
Holding, Japan Food Holding is in a better position as it has lower values. It has lower ratio,
therefore more suitable to invest.

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