Neo Group - RHB Invest 2016-02-05: Awaits FY17 To Better Digest The Gigantic Fish Ball

NEO GROUP LIMITED 5UJ.SI

Neo Group - Awaits FY17 To Better Digest The Gigantic Fish Ball

Maintain BUY and DCF-based SGD0.82 TP (34% upside) as we expect FY17 to be a better year for Neo Group’s catering business and it 55%- owned subsidiary TSH.
It has been aggressively advertising and chalking up market share in the catering space amidst the challenging retail environment.
We note that catering orders for Lunar New Year’s eve to the second day of this festive holiday have been filled as at two weeks ago.

Neo Group’s 9M16 (Mar) food catering revenue grew at a strong 31% on the back of aggressive advertising & promotions (A&P).
On the contrary, during our channel checks, we saw many corporates cutting down on food catering expenses.
The Consumer Price Index (CPI) for food catering was also flattish for 2015. As such, we think the food catering industry is likely to be slightly down or muted in 2016.
However, we expect Neo Group to continue demonstrating strong growth in FY17, as we believe the group would be taking market share from smaller players during this tough market.
Our recent conversations with management also suggests that the group was unaffected by the weaker retail sentiment.

Excluding one-off gains from property revaluation, 3Q16 results were weak due to higher-than-expected losses from higher advertising costs.
Thong Siek Holdings (TSH) continued to suffer from unfavourable forex changes during the quarter.
As management has said it would give TSH one year to deliver satisfactory results, we forecast for the latter’s earnings to break even by end-FY17.

With the proposed acquisition of the new kitchen at 22 Senoko Way for SGD15m, Neo Group is likely to sell-off at least one of TSH’s current kitchens.
We thus forecast for net gearing to be at 1.4x (FY16) and 1x (FY17). A consolidation of both TSH’s existing kitchen facilities into the new kitchen would be a key catalyst to enhance operational efficiencies.
Given the higher gearing ratio, we also do not expect any other major acquisitions in the near term.

We make minor tweaks of -2% to -4% to our earnings forecast but maintain our DCF-derived TP at SGD0.82.
We like Neo Group’s market leadership in the food catering space as we are optimistic on the long-term prospects of this sector.
In addition, while TSH’s losses look like a fish ball that is too big for Neo Group to swallow at the moment, we are positive on the potential value of DoDo fish balls and the network TSH could bring to the group.
We believe FY17F is to be a better year for Neo Group on improved results from TSH and a larger market share in the catering business.

Juliana Cai RHB Invest | http://www.rhbinvest.com.sg/ 2016-02-05

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.82 Same 0.82