Neo Group’s 2Q16 results surprised us on the downside with a 95% PATMI decline YoY. While this is largely due to one-off charges relating to its acquisitions, we now hinge heavily on the 2H16 festive seasons for a strong turnaround. During 2Q16, revenue grew by 89% to SGD31.3m in line with our expectation and PATMI turned profitable from a 1Q16 loss. We cut our earnings forecast by 28-54% and maintain BUY with a lower TP of SGD0.82 (from SGD1.20, a 24% upside).
■ The Good
Food catering revenue soared >30% throughout 1H15 due to increased marketing and promotional efforts which was significantly higher than the previous expectation for 20% YoY growth. With strong efforts in advertising and promotions, we believe revenue from this core segment will continue to grow strongly led by consumer demand.
■ The Bad…
Since Umisushi is perceived as a lower-tier brand compared to high-end restaurants, the recent cases of Group B Streptococcus bacteria has impacted its stores’ footfall and sales. In view of rising operating costs, we like management’s conservative approach to halt the expansion of its food retail business; no new outlets have been launched during the quarter. Overall, revenue for the food retail business grew only marginally at 1% led by increased delivery sales.
■ …and the Ugly
2Q16 incurred a non-controlling interest loss of SGD0.4m which implies that Thong Siek Holdings (TSH) incurred a loss of SGD0.94m for the quarter, 67% higher than its full year loss of SGD0.56m for its FYE Dec 2014. While the majority of the losses were attributable to one-off professional fees and write-off of old assets, TSH also suffered forex losses due to its global footprint. We estimate to see high expenses in 2H16 from the acquisition of CT Group in November 2015 but these costs should taper off in FY17F.
■ Maintain BUY with TP of SGD0.82
As 2H16 typically contributes 60% to 70% of full year EBITDA, it will be crucial for the group to achieve it. As a result of the one-off charges, high depreciation expenses and potential losses from TSH, we cut our forecast by 28-54% and switched to a DCF model to better reflect the cash flow of the company. We use a conservative terminal growth rate of 0% and 12.7% cost of equity to derive a TP of SGD0.82. As the share price has corrected significantly after the results announcement, we maintain a BUY recommendation with a 24% upside. (Read Report)
Source : RHB Research