Neo Group - RHB Invest 2017-11-14: Need More Time

Neo Group - RHB Invest 2017-11-14: Need More Time NEO GROUP LIMITED 5UJ.SI

Neo Group - Need More Time

  • Neo Group’s 2QFY18 results, which were dragged down by its newly acquired subsidiary – U Market, came in at a loss of SGD0.5m. However, we note that management has managed to turn around its food manufacturing and food retail businesses during the quarter. 
  • Given that its results are highly seasonal, we believe the group would be able to deliver much stronger earnings in 2H. 
  • Maintain NEUTRAL with an unchanged TP of SGD0.64 (3% downside).

U-Market is the new drag. 

  • Following our discussions with management, we understand that losses in 2QFY18 (Mar) were mainly attributed to the newly acquired subsidiary – U-Market. 
  • U-Market is involved in the manufacturing of Joo Chiat Kim Choo rice dumplings, trading and processing of meat products as well as retail outlets. Management has plans to turn the business around by closing unprofitable retail outlets, consolidating the operations to its headquarters office and leasing cold-rooms at lower rental rates.
  • We note that management has begun executing these cost-cutting measures in recent months and we should see better results from this subsidiary in the next two quarters. U-Market would also be able to leverage on Neo Group’s food manufacturing’s distribution network to strengthen its local sales and export its products.

Commendable turnaround of its other businesses. 

  • According to management, both its food manufacturing arm (Thong Siek subsidiary) and food retail (umisushi business) has turned around this quarter. On its food catering business, profitability has also improved as the group reduced promotional and advertising expenditure. 
  • It continues to look out for potential acquisition targets in the food catering space to expand its market share.

New corporate finance team, new hope. 

  • Over the past two years, the acquisition of non-profitable businesses have dragged down Neo Group’s results. We note that management has recently built a new corporate finance team, which has tighten the acquisition criteria to minimise any negative impact on the group’s bottomline and financial position.

Weak financial position is still a concern, give it more time. 

  • While we believe that there would be a show of stronger results in 2H due to seasonality, the group’s high net gearing of 213% and net liability position remain a tall concern. We believe the group needs more time to raise its profitability to improve its financial position. 
  • We maintain our NEUTRAL recommendation on the stock with an unchanged TP of SGD0.64.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-11-14
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.640 Same 0.640