Is Neo Group's turnaround in sight after a sizziling 90.7% jump in profit before tax?

Higher revenue helped to boost the bottom line of caterer Neo Group as it chalked up a net profit of S$3.92 million for the fourth quarter ended March 31, up nearly 43 per cent from the corresponding quarter a year ago. As they declare a final cash dividend of 0.5 cents for FY 19, let’s dig deeper into the overall financial of Neo Group.

Company Background

Sourced from Neo Group

Neo Group Limited is a leading food catering group in Singapore. Established since 1992, the Group possesses an award-winning track record and is one of the most recognised brand names in Singapore.

The company operate across 4 highly synergetic business segments:

  • Food Catering
  • Food Retail
  • Supplies and Trading
  • Food Manufacturing and other businesses

The Group supplies a large variety of quality food and buffets appealing to various market segments through its strong portfolio of brands, including Neo Garden Catering, Orange Clove Catering, Deli Hub Catering, Best Catering, umisushi, Choz Confectionery, DoDo fish ball, Joo Chiat Kim Choo traditional rice dumplings, amongst others.

Its food retail network spans 25 outlets islandwide. Through its subsidiaries, Neo Group's business presence is in 35 countries worldwide. Its operations are supported by the East and West central kitchens, manufacturing facilities, warehouses and over 1,400 dedicated employees.

Financial Highlights

In its latest earnings release, Neo Group’s revenue inched up 1.6% to S$181.0 million for the financial year ended 31 March 2019 compared to the previous year. That said, the company saw a 90.7% surge in profit before tax to S$6.2 million, mainly due to its strategy to consolidate and reduce low margin trading transactions and overheads for its Supplies and Trading business.

As of 4 Jun 2019 | Sourced from ShareInvestor’s WebPro

On this note, we take a deeper look into Neo Group’s profit and loss financials over the past 7 years.

Neo Group has scored remarkable growth in its top-line from S$41.6 million in FY2013 to S$181.02 million in FY2019. However, the profits have struggled to increase in tandem with the revenue due to low margins of below 5% since FY2016.

As of 4 Jun 2019 | Sourced from ShareInvestor’s WebPro

Zooming into its financial ratios, we can see that its PE ratio (denoted by the red line) has come down significantly due to a huge jump in its earnings from FY2017 (blue line). Its P/E ratio currently stands at 12.2x.

Moving on, Neo Group has a relatively high net debt-to-equity ratio of 1.65x, primarily due to the string of purchases such as Do-Do branded Tiong Siek unit, Lavish Dine Catering and How's Catering.

On a bright side, the high gearing has come down slightly from 1.91x in FY2017 and the firm is always performing on-going business reviews to turn around the acquisitions.

For an overview of Neo Group’s financials, you can also turn to the Financial Analysis function in ShareInvestor’s WebPro. From here, we can see the dark green smileys that the company has chalked up increasing revenue in last 4 consecutive years and has a good gross profit margin of 20-40% for 3 years.

In contrast, Neo Group is suffering from a high debt load and may have difficulty meeting short-term obligations due to a poor current ratio. On the flip side, the company is still generating free cash flow and has a ROE above 10% for the past 2 years.

Neo Group’s Ownership

As of 4 Jun 2019 | Sourced from ShareInvestor’s WebPro

Looking at the above ownership chart, we can see that the top 3 shareholders own a collective 77.62% of Neo Group.

1st up on the list is Mr. Neo Kah Kiat - Founder and CEO of the company with a sizable 68.6% stake. Top 2nd and 3rd shareholders’ interests belong to Mdm Liew Oi Peng and Mr. Lee Kwang Boon – both executive directors managing important food catering businesses in the company.

A high ownership level owned by the management team itself usually gives a positive signal in a company’s prospects.

On a side note, investors should also note that companies can proceed with a delisting when it garners at least 75% of shareholding approval with less than 10% of shareholdings against it.

Peer Comparison

As of 4 Jun 2019 | Sourced from ShareInvestor’s WebPro

Singapore is well known as a food heaven with the wide range of cuisines and tantalising food from hawker centres to restaurants. This may also be the reason behind many F&B listed companies in Singapore.

Taking a page from the ShareInvestor’s Factsheet, we can quickly find out the Industry’s P/E, market capitalization and dividend yield together with Neo Group’s peer competitors too.

A quick glance shows that Neo Group is one of the cheapest in the F&B industry with a P/E ratio of 12.1x. However, its dividend yield of 1.1% is considered one of the lowest in the industry. Last but not least, based on a market capitalization of S$65.5 million, Neo Group can be considered one of the smaller F&B players as compared to companies like Koufu, BreadTalk and Jumbo.

Happy investing!

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