SINGAPORE (Aug 10): RHB is maintaining its “neutral” rating on Neo Group with a target price of 64 cents even though the group is expected to show stronger improvement in earnings in the coming quarters.
In a Thursday report, analyst Juliana Cai says that the group’s weak financial position is worrisome as its net gearing reached a record high of 204% following aggressive acquisitions in the past years.
“The interest coverage ratio was below 1x base on the FY17 full year result and the group is in a net liability position,” says Cai.
But management says it has sufficient cash to support the group’s operations after its debt is due and Cai says the group is also slowing down its pace of acquisitions to avoid its cost from increasing more than its revenue.
The group has just terminated its proposed acquisition of Park Food Manufacturing and extended the exclusive period for the proposed acquisition for Lavish Dine and Asia Farm.
In 1Q18, group revenue grew 27% to $40.6 million, mainly driven by the group’s new acquisitions U-Market Place in Jan and Hi-Q Plastic in April.
Its food catering business also grew 5% as it entered a new market segment catering to eldercare and childcare, while its food manufacturing business grew 5% after a successful launch of new products.
See: Neo Group 1Q loss narrows 74% to $0.7 mil as Food Manufacturing returns to profitability
Hence, Neo Group’s 1Q18 losses were reduced by 78% y-o-y.
In order to support its margins, the group cut its advertising and promotional activities.
Shares in Neo Group are trading 1 cent lower at 67 cents as at 11.12am.
