Neo Group - Mixed Bag Of Results
- Although the long-awaited food manufacturing segment has finally turned operationally profitable, we think the good news is more than offset by the negative growth in the food catering wing. The latter is still Neo Group’s most profitable business. We believe that a downturn in this segment would negatively impact the group’s earnings.
- We downgrade the counter to NEUTRAL (from Buy) with a new SGD0.61 TP (from SGD0.80, 5% upside) on a weaker outlook for Singapore’s food catering industry.
Food catering disappoints.
- Neo Group had previously expected to grow its food catering market share via aggressive marketing. We now suspect there has been a decline in market share during the quarter, with the group registering a 6.5% decline in revenue.
- We note that topline for this segment fell 3.6% for 9MFY17 (Mar) on the absence of SG50 celebrations.
- Going into 2017, we think the slowdown in Singapore’s economy would result in further tightening of recreational budgets for both corporate and private social events.
DoDo revival, but execution would be slower than expected.
- Neo Group’s food manufacturing wing has finally turned operationally profitable in 3QFY17.
- While the group is on the right track in turning the DoDo business around, we understand that the transfer of operations to the new premise at 22 Senoko Way is expected to take place over the course of 2017.
Downgrade to NEUTRAL.
- We cut our FY17F-19F earnings by about 45% pa, as we now expect muted growth and weaker margins in the food catering business.
- We also delay some of the cost savings in the food manufacturing business. These are likely to be fully realised in 2018 only.
- We cut our DCF- derived TP to SGD0.61 (from SGD0.80), implying 17x FY18F P/E.