Neo Group - RHB Invest 2017-05-26: Cooking In Progress

Neo Group - RHB Invest 2017-05-26: Cooking In Progress NEO GROUP LIMITED 5UJ.SI

Neo Group - Cooking In Progress

  • Maintain NEUTRAL call on Neo Group with TP of SGD0.62 (9% upside). 
  • Excluding one-off items, FY17 (Mar) core PATMI of SGD3.9m was in line with our expectations. 
  • Moving into FY18F, we are relieved that CEO, Mr Neo, indicated that the group would focus more on growing bottomline instead of chasing revenue. 
  • The group had previously announced three proposed acquisitions to be completed by end-2017. However, given its high gearing ratio, we expect the group to slow down on its acquisition pace going forward.

Growth in core business tapers off. 

  • Last year, demand for food catering was sluggish due to the absence of SG50 celebrations. Given the lacklustre consumer sentiment, we expect industry growth to remain tepid this year. 
  • To mitigate slowing growth, Neo Group is looking to grow volume through its newly-established catering brand – Gourmetz. Gourmetz targets elderly and childcare centres as well as corporate contracts such as packed lunches, which typically attract lower margins.

Strong developments in food manufacturing and food supplies trading.

  • Future growth for the group would likely be driven by newly-acquired businesses – food manufacturing (Dodo business) and supplies & trading (CT Veg and U-market).
  • We note that the food manufacturing business was on the verge of turning around. Excluding one-off expenses, the food manufacturing segment delivered positive EBIT for FY17.
  • The supplies & trading segment recorded a 30% YoY fall in FY17 EBIT. We believe this was mainly attributed to the acquisition of U-market as there would have been some one-off professional fees involved.
  • We believe the group could leverage on Dodo’s local and export markets, as well as CT Veg’s network to distribute U-Market’s meat products going ahead.

Maintain NEUTRAL. 

  • We maintain our NEUTRAL call on the stock for now, with TP of SGD0.62 pegged to 21x FY18x P/E – in line with the peer average. 
  • The positive momentum in food manufacturing is encouraging but we think the group may need a couple more quarters to turn the division around at the net profit level, and also to digest the newly-acquired U-Market business.
  • Key catalysts for the stock would include positive contributions from the food manufacturing business and U-Market.

Juliana Cai CFA RHB Invest | 2017-05-26
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.620 Up 0.610