My understanding from your case study is that Breadtalk’s free cashflow is much higher than their net profit because of their fast depreciation policy.
I have a question for this. As per Breadtalk’s Depreciation Policy stated in the 2013 annual report below, it actually looks normal and reasonable in terms of the numbers of years for depreciation for the items below. Is it possible to clarify where is their fast depreciation coming from?
Leasehold property – 20 – 57 years
Leasehold land – 57 years
Machinery and equipment – 5 – 20 years
Electrical works – 5 – 6 years
Furniture and fittings – 5 – 6 years
Office equipment – 3 – 6 years
Renovation – 2 – 6 years
Motor vehicles – 5 – 6 years
Good question! I was as curious as you are now when I saw the huge amount of depreciation in BreadTalk. The first thing that I did was to dig out their depreciation policy on the respective assets. And guess what… nothing interesting! The standard depreciation time range was also being used by other companies.
So I took an unconventional route to measure it by using the formula depreciation/ppe as my baseline back in 2012. I compared BreadTalk (~4 years) with ABR (~6 years) and Sakae (~8 years) and, since the depreciation is based on a time range, I figured out that BreadTalk definitely took a more conservative depreciation method (depreciate faster than others). Using the same method, a palm oil business takes about 15 years and a shipping business takes 13 years to depreciate (these assets generally last longer).
I hope that answers your question about my analysis back then. Of course, it is still better to check with the management directly for a more accurate version on how they depreciate these non-current assets.
Wow, thank you very much for the reply!
FYI. I talked to the CEO Oh Eng Lock during this year’s agm and he mentioned that the depreciation for the bakeries/restaurants are done on a straight line basis, as per accounting standards. From the Annual Report, it should roughly be 2+2=4 years for the depreciation. (2+2 means 2 years for rental period of the bakeries, +2 for estimated extension rental of the bakeries)
I have also emailed Breadtalk’s investor relations See Kim, firstname.lastname@example.org, with this question:
“In the 2013 annual report page 75, depreciation of renovation is reported as 2 – 6 years, and machinery and equipment – 5 – 20 years. Is it possible to give some explanation for the huge variation in the number of years? Also, is it possible to give some examples of renovation with useful life of 2 years and 6 years? And examples of useful like of machinery and equipment for 5 and 20 years?”
See Kim’s Reply:
“With regard to your question, depreciation of renovation is 2-6 years depending on the lease term of a particular outlet. It varies.
As for the depreciation period of machinery and equipment, we look at the useful life of that equipment – e.g. office equipment has a shorter useful life while a production line located at our own building (which has a lease of 30 years + 30 years) will be depreciated for a longer period of time.”
Basically, from this exchange of email, I did not manage to gain any insights on their faster depreciation, lol. As you correctly mentioned, their depreciation policy is pretty standard.
What do you think?
I was there too! (You weren’t there to stalk me, weren’t you? Lol) It was standard answer given by him. I assume the figure for depreciation against property, plant and equipment will be a better measurement on how aggressive/conservative they are. It’s audited and declared publicly anyway.
Glad that you go extra mile to find so much information. Keep it up! :)
Yeah I was there to stalk you lol. Thanks for the answer! I will look up the figures!
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