1QFY18 (Mar) losses decreased by 74% to SGD0.65m – except for food retail, all divisions showed positive growth in revenue. The lower losses were attributed to better cost control and a turnaround at the food manufacturing business. A high net gearing of 2x and the net current liability position of SGD17.5m remain causes for concern. The stock is trading at 26x FY18F P/E. We maintain our NEUTRAL rating with revised TP of SGD0.64 (from SGD0.62, 5% downside), as we think the market has priced in its near-term earnings recovery.

1QFY18 revenue grew by 27% YoY to SGD40.6m. This was mainly driven by new acquisitions, U-Market Place in Jan 2017 and Hi-Q Plastic in Apr 2017. The food catering business grew by 5% as Neo Group (Group) had in Nov 2016, entered into a new market segment catering to eldercare and childcare. The food manufacturing business also grew by 5% due to a successful launch of new products.

Losses were reduced substantially despite seasonal weakness. 1QFY18 losses were reduced by 74% as a result of operational improvements in the food manufacturing business. The Group cut its advertising and promotional activities to support margins.

Weak financial position is worrisome. As a result of aggressive acquisitions in past years, net gearing reached a record high of 204%. The interest coverage ratio was below 1x based on FY17’s full-year results, and the Group is in a net liability position. The management announced that it has sufficient cash to support the Group’s operations when its debt is due. We note that the Group is also slowing down its pace of acquisitions to prevent its costs from increasing more than its revenue. It has terminated the proposed acquisition of Park Food Manufacturing, and extended the exclusive period for the proposed acquisition for Lavish Dine and Asia Farm.

Maintain NEUTRAL at least until the Group’s financial position improves. We raised our forecasts by 4% for FY18F-19F on better cost control, and as a result raised our TP to SGD0.64 (from SGD0.62) pegged to 21x FY18F P/E. We believe earnings would show a stronger improvement in the coming quarters.

Source: RHB Research - 10 Aug 2017