Neo Group Limited - Singapore’s No. 1 event caterer

VALUATION 
Neo Group (Neo) is trading at 5.4x 2015 P/B and 17.6x 2015 PE.

INVESTMENT HIGHLIGHTS
Neo is Singapore’s No. 1 event caterer, having captured 10% market share of the country’s S$360m catering industry. In addition to the household brand Neo Garden Catering, the company has several other brands under its belt such as Orange Clove, Delihub and Best Catering so as to capture the catering industry’s different market segments. Neo also operates several food retail points under umisushi, issho izakaya and nanami udon.

Recently, Neo announced that it will acquire a 55% stake in Thong Siek Group for S$7.35m. Thong Siek manufactures and distributes seafood and Surimi-based products under the “DoDo” brand to 22 countries in Asia, Europe and the US.

Reported its 14M15 financial results after it changed its financial year end from 31 January to 31 March. Revenue jumped 47.8% yoy to S$77.4m partly due to the longer financial year period (14 months vs 12 months in FY14) and stronger sales from its food catering business which reached S$57.4m. (FY14: S$39.0m). However, NPAT only grew 15.7% to S$7.4m as the company had to increase employee benefits expenses to S$20.1m in the 14 months (FY14: S$15.8m) due to the additional headcount in the new facility at 1 Enterprise Road to support the company’s growth.


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OUR VIEW
Strong cash generative business. Customers have to pay by cash or cheque upon delivery which explains its strong operating cashflow. Net cash from operations rose 33.6% to S$10.5m in 14M15 from S$7.86m in the last financial year. But unlike obtaining longer credit terms from its suppliers, management revealed that it will rather purchase most of its raw materials on cash terms in order to secure better prices and which will translate to higher profits.

Neo is also able to capture margins along the value chain. By reaching out directly to customers through its food catering business and retail outlets from its own established central kitchen and food trading and supplies business, Neo is able to extract margins by enjoying economies of scale and sourcing ingredients in bulk and bypassing the middle man. As such, Neo is able to report higher net profit margins of 9.6% as compared with peers’ 2.1-7.6%.

Demand for food catering set to rise on the back of growing MICE activities and Neo securing various venue-tied official/preferred caterer partnerships. In addition, home dwellers may start switching to daily meals catered by Neo in view of the convenience and healthier choices (option of less oil, less salt or brown rice), both of which appeals to younger home owners.

However, risks to new investors could be the lack of liquidity as only US$0.03m worth of shares were traded on average in the last 30 days.

Source : UOB KayHian Research

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