Neo Group - RHB Invest 2016-01-29: Potential Consolidation Of Kitchens

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NEO GROUP LIMITED 5UJ.SI 

Neo Group (NGL SP) - Potential Consolidation Of Kitchens 

What’s New 

 Proposed acquisition of new property. 

• Neo Group announced that subsidiary Thong Siek Holdings Pte Ltd (TSH) has exercised an option to purchase a property at 22 Senoko Way from Country Foods Pte Ltd (Country Foods) with total purchase consideration of SGD15m. 
• The property has a total land area of 14,807 sq m and 34 years of remaining lease term. 

 Rationale for acquisition. 

• The property has an existing cold facility and is 2.4x bigger than TSH’s existing premises at 14 Senoko Way. Neo Group thus expects potential rental savings of c.SGD840,000 pa as well as rooms for future upgrading should the Jurong Town Council (JTC) grant the purchase approval. 

Our View 

 Potential consolidation of kitchen facilities. 

• One-off costs and inefficiencies in TSH’s operations have dragged down Neo Group’s 2QFY16 (Mar) results. Management said it may combine TSH’s two existing kitchens (14 Senoko Way and Johor Bahru) into one to cut costs should TSH fail to deliver satisfactory results in one year’s time. 
• We believe that the new property has adequate space to accommodate TSH’s existing facilities. 
• Any acceleration in management’s plans to merge the existing kitchens would be positive to the group’s operations and financials. 

 Maintain BUY and DCF-derived SGD0.82 TP. 

• We keep our forecasts unchanged for now. Neo Group is to fund the property acquisition through internal funds and bank borrowings post the JTC’s approval. 
• We expect Neo Group to sell off TSH’s existing facilities to enhance its cash flow if the proposed acquisition materialises. 

 Likely to announce 3QFY16 results on 3 Feb. 

• According to the Department of Statistics’ Food & Beverage Services Index, food caterers’ sales were down YoY by 0.2% (Oct 2015) and 2.5% (Nov 2015). However, we expect Neo Group to reap some returns from its expensive advertising and promotional exercise in 2015. 
• We believe it would outperform industry peers and deliver positive growth on food catering revenue as it captures market share from smaller players.

Juliana Cai RHB Research | http://www.rhbinvest.com.sg/ 2016-01-29

RHB Research SGX Stock Analyst Report BUY Maintain BUY 0.82 Down 1.20