SINGAPORE (May 26): RHB is maintaining its “hold” call on Neo Group with 62 cents target price as it expects the group to slow down on its acquisitions, given its high gearing ratio.
In a Friday report, analyst Juliana Cai says FY17 core earnings excluding one-off items, came in line with the broker’s expectations.
Cai is also relieved that its CEO has indicated that the group would focus more on growing bottomline instead of chasing revenue.
(See also: Neo Group posts 46.2% fall in FY17 earnings to $3.3 mil)
To recap, demand for food catering last year was sluggish due to the absence of SG50 celebrations. Cai expects industry growth to remain tepid this year given the lacklustre consumer sentiment.
To mitigate slowing growth, Neo Group is looking to grow volume through its newly-established catering brand, Gourmetz which targets, childcare centres, homes for the elderly as well as corporate contracts although these attract lower margins.
Instead, future growth for the group would likely be driven by newly-acquired businesses including food manufacturing by Dodo and supplies and trading by CT Veg and U-market.
“We note that the food manufacturing business was on the verge of turning around,” says Cai, “excluding one-off expenses, the food manufacturing segment delivered positive EBIT for FY17.”
The supplies & trading segment recorded a 30% y-o-y fall in FY17 EBIT mainly attributed to the acquisition of U-market as there would have been some one-off professional fees involved.
Cai believes the group could leverage on Dodo’s local and export markets, as well as CT Veg’s network to distribute U-Market’s meat products going ahead.
“The positive momentum in food manufacturing is encouraging but we think the group may need a couple more quarters to turn the division around at the net profit level, and also to digest the newly-acquired U-Market business,” says Cai.
Shares of Neo are trading 1 cent higher at 58 cents.
