Neo Group

UOBKayhian on 20 Sept 2012

Valuation
· The stock is trading at 7.6x FY13F PE as at the last traded price with an interim dividend yield of 1.5%. This is on the back of a 100% dividend payout of 0.49 S cents EPS for 1HFY13. Management has guided that they are likely to adhere to the 60% payout ratio as stated in their IPO prospectus for FY13.

Investment Highlights
· A war chest of S$10m cash & its equivalent to fund its expansion in its food catering business segment, which includes its unused net IPO proceeds of S$5.77m. Management has plans to increase its market share through acquisitions or JVs of local or even overseas competitors. The corresponding segment represents about 78% of FY12 revenue and comes with a PBT margin with over 20%.

· Looking to increase its Umisushi outlets from 17 to 30 outlets by 2016. Its retail segment represents 22% of FY12 revenue and management indicated that this segment is now finally in the black, fuelled by an increase of the number of outlets to 17 from 14 a year ago.

· Looking to achieve economies of scale. The group is looking double its capacity from serving 15,000 guests/day to 30,000 guests/day. To achieve this, the group is looking to consolidate all resources at its upcoming new building at 30B Quality Road from its current dispersed four central kitchens with a combined size of about 27,000sf. The estimated cost of the new building is S$20m-30m excluding the cost of S$8.8m for the 30-year industrial land tenure (122,150sf). Construction of the new building is likely to commence on 1Q13 over three years via debt financing. Currently the group is in net cash.

· Chairman & CEO Neo Kah Kiat increased his direct stake in Neo Group to 71.06% with an open market purchase of 584,000 shares at an average cost of S$0.33489/share before brokerage during 17 & 18 Sep 12. He also has a deemed stake of 8% held through his spouse.

Financial Highlights

· 1HFY13 revenue grew 12% to S$18.76m as compared to the last corresponding period. This is likely due to an increase in orders after gaining its listing status. Management has indicated that the group has the discretion to adjust discounts on their menus should prices of food supplies increase. The increase in 1HFY13 revenue did not include the seasonally higher Chinese New Year (CNY) sales period for 1H13 as the group reports its year-end as at 31 January.

· However, PBT was down by 53.6% hoh as the group recorded higher expenses. Purchases & consumables used have increased by 21% (+S$1.14m). Rental expenses jumped 40% (+S$0.35m) due to the increase in number of Umisushi outlets. Employee benefits expenses increased 26.9% (+S$1.16m) as headcount increased from 330 as at FY12 to over 400.