NEO Group - RHB Invest 2015-11-04: Upwards Integration

NEO Group - RHB Invest 2015-11-04: Upwards Integration NEO GROUP LIMITED 5UJ.SI 

NEO Group - Upwards Integration

  • Neo Group acquired 90% of CT Group for SGD5.4m (9.2x FY15 P/E), in line with its aspiration to become a vertically-integrated value chain. 
  • As this exercise is earnings-accretive, we raise our TP to SGD1.25 (from SGD1.20, 72% upside), which implies 20x FY16F P/E and maintain BUY
  • We expect more food-related target acquisitions to come as the group continues to seek inorganic opportunities to accelerate growth and support its core food catering business. 

 Acquisition of CT Vegetables & Fruits Pte Ltd (CT Group). 

  • CT Group is a vegetable and fruit trading business established in 1991. It has a wide customer base comprising local hospitals, foreign cruise ships and ship chandlers. Neo Group believes that CT Group’s business can be synergised with its food and catering supplies segment to: 
    1. ensure the timely delivery of food supplies at a lower cost, and 
    2. reduce its reliance on third-party suppliers. 

 Purchase consideration. 

  • The total consideration for the acquisition is SGD5.4m (9.2x FY15 P/E) for a 90% stake in CT Group. SGD4.8m is to be paid in cash and funded through bank loans while SGD0.6m would be funded through new shares issued. The remaining 10% would continue to be held by one of CT Group’s founders, James Teo Kian Lam, who is to continue to be the acting CEO and chairman of the acquired group. 

 Maintain BUY, with a TP of SGD1.25. 

  • As the acquisition is mildly earnings-accretive, we raise our net profit forecast by 3-6% for FY16F- 18F. 
  • We also nudge up our FY16F EPS to 6.2 cents from 6 cents and increase our TP to SGD1.25 (from SGD1.20). 
  • In line with the group’s aspiration to be a vertically-integrated food and catering solutions company, we believe that Neo Group is to continue to look out for more inorganic expansion opportunities in the food & beverage (F&B) space.

Juliana Cai RHB Research | 2015-11-04
RHB Research SGX Stock Analyst Report BUY Maintain BUY 1.25 Up 1.20