10 September 2014

Neo Group 1H15 Result Summary - September 2014

Neo Group reported an increase of 21% in first half year 2015 revenue compared to corresponding period last year, despite the drop of net profit of 9.1% compared to the same period last year (Net profit margin dropped to 9% from 12%). The main reasons due mainly to increase in depreciation expenses, advertising expenses for restaurant related businesses as well as operating lease expenses due to the expansion of the business operation.

According to the group, they are in transition to double up their capacity in operation. The new centralized kitchen is targeted to be completed by October 2014 which I believe it will improve the gross profit margin as well as net profit margin in second half year 2015 result. I am quite surprised that the group also engage in online florist business although it is somewhat indirectly linked to existing catering business.



For financial ratio analysis, the PPE to total Asset ratio is quite high (57%), and it may cause the net profit margin to be affected by higher depreciation expenses in future. Nonetheless, I believe that part of the PPEs are meant for the machines that can reduce the manpower cost that is escalating now due to the government's foreign labor tightening policy. The company also is highly leveraging company that relies on bank borrowings to further support its PPE purchase.

The NAV is 14.2 cents with half year 2015 eps set at 1.75 cents. With annualized PE of about 25 - 30 X, I believe that the market already have factored in the potential growth as what the company proposed in its transition plan to double up the capacity. It may leave a little margin of safety if you purchase the counter at this price. Nonetheless, if the group continues its 60% dividend payout policy, it may translates to dividend yield of about 2% - 3%. It may be suitable for investors who are looking for moderate yet sustainable dividend growth business.

The main risk is whether the transition is completed successfully, and whether the company can grow fast enough to offset the increasing depreciation cost due to the increasing capital expenditures and cope with the escalating labor cost due to the government foreign labor tightening policy.

Company Comments on outlook


The outlook of the industry in which it operates is expected to remain positive. However, the Group expects the Food and Beverage industry to remain challenging including rising costs due to higher manpower cost, raw material cost and outlet rents. The Group will continue to execute our marketing and operation expansion strategies. We will also aim to achieve cost advantages from the economies of scale in consolidating our operation cost better. We believe these will grow our overall competitiveness and gain a stronger foothold in our overall businesses.

With the expansion of the operation line situated at Enterprise Road, the Group targets to grow its revenue in Food Catering Business with higher capacity. As for its Food Retail Business, the Group will be focusing on expanding by an increase in the number of food retail outlets to cover Island-wide to better capture our
elivery business. As for the Food and Catering Supplies Business, the Group will continue to centralised its procurement to better manage the qualities and costs.

Barring unforeseen circumstances, the Group expects to be profitable for the rest of the FY2015. The Company has changed its financial year end from 31 January to 31 March (please refer to the announcement reference no. SG140516OTHR8KP9 dated 16 May 2014). The financial period for FY2015 will now cover a 14 month period from 01 Feb 2014 to 31 March 2015.




No comments:

Post a Comment

Related Posts Plugin for WordPress, Blogger...