Neo Group - Upwards Integration


Neo Group acquired 90% of CT Group for SGD5.4m (9.2x FY15 P/E), in line with its aspiration to become a vertically-integrated value chain. As this exercise is earnings-accretive, we raise our TP to SGD1.25 (from SGD1.20, 72% upside), which implies 20x FY16F P/E and maintain BUY. We expect more food-related target acquisitions to come as the group continues to seek inorganic opportunities to accelerate growth and support its core food catering business.

CTGroup

Acquisition of CT Vegetables & Fruits Pte Ltd (CT Group)
CT Group is a vegetable and fruit trading business established in 1991. It has a wide customer base comprising local hospitals, foreign cruise ships and ship chandlers.

Neo Group believes that CT Group’s business can be synergised with its food and catering supplies segment to:
i) ensure the timely delivery of food supplies at a lower cost, and

ii) reduce its reliance on third-party suppliers.

Purchase consideration
The total consideration for the acquisition is SGD5.4m (9.2x FY15 P/E) for a 90% stake in CT Group. SGD4.8m is to be paid in cash and funded through bank loans while SGD0.6m would be funded through new shares issued. The remaining 10% would continue to be held by one of CT Group’s founders, James Teo Kian Lam, who is to continue to be the acting CEO and chairman of the acquired group.

Technical Analysis
Daily Chart
Maintain BUY, with a TP of SGD1.25
As the acquisition is mildly earnings-accretive, we raise our net profit forecast by 3-6% for FY16F-18F. We also nudge up our FY16F EPS to 6.2 cents from 6 cents and increase our TP to SGD1.25 (from SGD1.20). In line with the group’s aspiration to be a vertically-integrated food and catering solutions company, we believe that Neo Group is to continue to look out for more inorganic expansion opportunities in the food & beverage (F&B) space. (Read Report)

Source : RHB Research

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