NEO Group - RHB Invest 2017-08-10: Catering Better Results

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NEO GROUP LIMITED 5UJ.SI

NEO Group - Catering Better Results

• NEO Group's 1QFY18 (Mar) losses decreased by 74% to SGD0.65m; except for the food retail, all divisions showed a positive growth in revenue. The lower losses were attributed to a better cost control and turnaround of the food manufacturing business. 
• A high net gearing of 2x and the net current liability position of SGD17.5m remain a cause for concern. 
• Currently trading at a 26x FY18F P/E multiple, we maintain NEUTRAL on the stock with a SGD0.64 TP (-5% estimated return) as we think the market has priced in a near-term earnings recovery.

1QFY18 revenue grew by 27% YoY to SGD40.6m. 

• This was mainly driven by the new acquisitions U-Market Place in January 2017 and Hi-Q Plastic in April 2017. 
• Food catering business grew by 5% as Neo Group (Group) entered in November 2016 into a new market segment catering to eldercare and childcare. The food manufacturing business also grew by 5% due to a successful launch of new products.

Losses were reduced substantially despite a seasonal weakness. 

• 1QFY18 losses were reduced by 74% as a result of operational improvements in the food manufacturing business. 
• The Group cut its advertising and promotional activities to support margins.

Weak financial position is worrisome. 

• As a result of its aggressive acquisitions in the past years, net gearing reached a record high of 204%. The interest coverage ratio was below 1x base on the FY17 full year result and the Group is in a net liability position. The management announced it has sufficient cash to support the Group’s operations when its debt is due. 
• We note that the Group is also slowing down its pace of acquisitions to avoid its cost from increasing more than its revenue. It has terminated its proposed acquisition of Park Food Manufacturing and extended the exclusive period for the proposed acquisition for Lavish Dine and Asia Farm.

Maintain NEUTRAL at least until the Group’s financial position improves. 

• We raised our forecasts by 4% for FY18-19F on better cost control and as a result raised our TP to SGD0.64 (from SGD0.62) pegged to a 21x FY18F P/E. 
• We believe earnings would show a stronger improvement in the coming quarters.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-08-10

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.640 Up 0.620