NEO GROUP LIMITED (SGX:5UJ)
NEO Group - Stretched Balance Sheet A Key Concern
- We are ceasing coverage on Neo Group due to low interest and trading liquidity of the stock. Our last recommendation was NEUTRAL with a Target Price of SGD0.64.
- As Neo Group continues to embark on an acquisition spree, we view the high net gearing ratio of > 1.9x as worrisome amidst the rising interest rate environment.
- We note that the new acquisitions could take more time to turn around and ramp up, while the high interest cost erodes the earnings of its core catering brands.
Founded in 1992, Neo Group is the leading social events food caterer in Singapore.
- Neo Group's core brands include Neo Garden, Orange Clove and Deli Hub. In recent years, it further ventured into food manufacturing and food trading & supplies through the acquisition of Thong Siek, CT Vegetables and U Market, amongst others.
Unstoppable expansion…
- On top of the above acquisitions for greater vertical integration, the group continues to expand aggressively in the catering space.
- Neo Group established new catering subsidiaries including Gourmetz, Kim Paradise and Savoury Catering to cater to the childcare segment and Tingkat business. This year it also acquired Lavish Dine and How Catering, with the former providing high-end catering and the latter, to service the corporate/public sector.
... but at a high cost.
- Neo Group’s high net gearing ratio stood at 1.9x as at 30 Sep 2018 and net current liability position remains a tall concern. In FY18, finance cost eroded 43% of EBIT.
- We note that the group is taking active steps to cut down on low margin business to improve on profitability and turn around new businesses. However if the group continues its acquisition spree through increased borrowings, we see more downside pressure on future earnings.
Juliana Cai
RHB Securities Research
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https://www.rhbinvest.com.sg/
2018-11-27
SGX Stock
Analyst Report
99998
SAME
0.640
