NEO GROUP LIMITED
5UJ.SI
Neo Group - A Good Start
- While Thong Siek Holdings (TSH) is currently still loss-making, we are relieved to notice significant improvements in its results, after Neo Group management stepped in to scale up on back-end integration.
- Neo Group’s 1QFY17 (Mar) loss of SGD2.5m was unsurprising, as the period tends to be the weaker season for food catering.
- We maintain our BUY recommendation, fine-tuning our DCF-derived TP to SGD0.80 (from SGD0.82, 29% upside).
Remarkable improvement in TSH.
- We estimate TSH’s losses in 1QFY17 have halved compared to 2Q16, when it was first consolidated for a full quarter.
- We believe this momentum will be sustained throughout the year as Neo Group continues to reap the economies of scale via back-end integration. At this rate, we think TSH could potentially break even next year.
Weaker economy hurts food catering budgets.
- Unfortunately, during our channel checks, many companies indicated lower recreational budgets this year due to the weak economic outlook.
- In addition, there are fewer incentives for companies or government institutions to spend this year in the absence of government grants for the SG50 celebrations. Hence, we expect growth in the catering industry to be muted for this calendar year.
Taking market share from small players.
- Neo Group has indicated that it will seize the opportunity to grab market share from the smaller players in this challenging operating environment. Management targets to increase its market share to 25%, from 14.7% in FY16, though no timeline was given.
Maintain BUY.
- Our FY17F earnings remain largely unchanged, but we trim FY18F earnings by 9%, to reflect higher advertising and promotion (A&P) costs needed to win market share. As such, we tweak our DCF-derived TP to SGD0.80 (from SGD0.82, implying 16.6x FY17F P/E).
Juliana Cai
RHB Invest
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http://www.rhbinvest.com.sg/
2016-08-05
RHB Invest
SGX Stock
Analyst Report
0.80
Down
0.82
