RHB Securities 2015-08-12: Neo Group Ltd - 1Q16; Affected By Seasonality. Maintain BUY.

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NEO GROUP LIMITED 5UJ.SI

Affected By Seasonality 

• Despite a strong 62% growth in 1QFY16 revenue, Neo Group reported a loss of SGD0.5m after accounting for exceptional items. 
• Maintain BUY and SGD1.20 TP (49% upside, 20x FY16F P/E). 
• We highlight that the first quarter is traditionally the weakest quarter due to a lack of festivities to drive large orders. 
• We expect Neo Group to show improved profitability as revenue expands further from 2QFY16 onwards. 

 1QFY16 (Mar) revenue up 62% to SGD20.7m. 

• The food catering segment continued to demonstrate stellar results with a 32% increase in revenue driven by aggressive marketing activities and expanded kitchen capacity. This exceeded our expectation of 20% YoY growth. 
• Food retail segment sales grew 16% YoY on the back of delivery sales and promotions held during the South-East Asian (SEA) Games. 
• In addition, the newly-acquired Thong Siek Holdings (TSH) contributed SGD3.5m to topline with just one month of financial consolidation. 

 Results dragged down by seasonality. 

• Bottomline suffered from high operating leverage as there were fewer orders during the first quarter. 
• Consolidation of TSH and higher material prices also brought 1QFY16 gross margin down to 63% from 70% in 1QFY15. 
• In addition, the completion of its new central kitchen at end-2014 raised depreciation expenses by 87%. 
• Nonetheless, we expect profitability to improve for the year as revenue shows stronger growth with festive seasons lining up for the rest of the year, including the Hungry Ghost Festival (2QFY16), Christmas (3QFY16) and Lunar New Year (4QFY16). 

 Consolidation of Umisushi. 

• Management plans to rationalise expansion of Umisushi in Singapore as opposed to its previous target of opening 30 stores by 2016. 
• We note that Neo Group will be introducing new retail concepts this year. It will continue to seek opportunities to export its retail model overseas. 

 Maintain BUY with SGD1.20 TP. 

• We adjusted our topline forecast to reflect better information on TSH and a change in strategy for its food retail segment. 
• Nonetheless, our earnings forecasts remain intact. 
• We expect a much better performance from the second quarter onwards with larger catering volume filled by its new central kitchen. 
• The key risk to our forecasts is the slowdown in food catering demand.

Juliana Cai | http://www.rhbgroub.com/ RHB Securities 2015-08-07

BUY Maintain BUY 1.20 Same 1.20