SINGAPORE (Nov 14): RHB Research continues to rate catering firm Neo Group at “neutral” at an unchanged target price of 64 cents after its 2Q18 results, which were dragged down by newly-acquired subsidiary U-Market, was reported to come in at a loss of $0.5 million.
See: Neo Group sinks into the red in 2Q on absence of one-off gain
U-Market is involved in the manufacturing of Joo Chiat Kim Choo rice dumplings, the trading and processing of meat products, as well as retail outlets.
See: Neo Group to buy 55% of U-Market for $1.9 mil' RHB reviewing 'buy'
In a Tuesday report, analyst Juliana Cai notes that Neo Group’s management has begun to execute its intended cost-cutting measures to turn U-Market around in recent months, and hence expects better results from this subsidiary in the next two quarters ahead.
She also believes U-Market will be able to leverage on the group’s food manufacturing distribution network in order to strengthen its local sales and export its products.
“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,” says Cai.
“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,” adds the analyst.
While Neo Group’s weak financial position remains a concern, Cai highlights how the group recently built a new corporate finance team, which she believes to bring “new hope” to the group as it has tightened the acquisition criteria to minimise negative impacts on the group’s bottom line and financial position.
“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,” she concludes.
As at 11.36am, shares in Neo Group are trading 2 cents higher at 68 cents, or 2.75 times FY18 book.
