The Story Behind This Company’s 200% Rise in Share Price in 2 Years

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What is a celebration without food? A birthday party, wedding, or just a family get-together would often call for a sumptuous buffet. Neo Group (SGX: 5UJ) is one such company that caters to such events.

Ranked by Euromonitor International, Neo Group was the top events caterer in Singapore in 2012 with a 9% share of the events catering market (Euromonitor International estimated said market to be at S$306.6 million in 2011 and thinks that it can compound at 12.9% from 2012 to 2014).

The company went public in the same year (July 2012 to be a little more precise) at $0.30 a share and is currently selling at $0.94 apiece. In comparison, the Straits Times Index (SGX: ^STI) has gained just 9.8% to 3,283 points currently in the same amount of time. What has caused Neo Group to rise an astronomical 213% in a short span of two years?

The business

Neo Group is engaged in the Food Catering, Food Retail, and Food and Catering Supplies businesses. Under the Food Catering business, it has four brands – Neo Garden Catering, Deli Hub Catering, Best Catering and Orange Clove Catering – that serves the mass market to high-end market.  Best Catering is the company’s newest brand – it was launched in March this year – and it provides Tingkat services and economical buffets. Orange Clove Catering is an example of Neo Group’s high-end buffet service.

Under the Food Retail business, Neo operates a chain of 24 umisushi outlets across Singapore and 1 licensed outlet in Jakarta, Indonesia, which opened in July 2013.

The Food and Catering Supplies business sources for ingredients and materials directly from manufacturers and distributors. Furthermore, it supplies ingredients and Japanese food products to other businesses.

Catering may be a business with low barriers to entry but the know-how, technology, economies of scale, and branding are certainly hard to obtain overnight. Since Neo Group orders its ingredients and materials in bulk, it can bring down its costs substantially. Recently, it was revealed by Brand Finance that the brand value of Neo Group is at US$18 million. This is slightly higher than the brand value of other Food & Beverage businesses such as Soup Restaurant (SGX: 5KI) and Auric Pacific (SGX: A23); the two companies have brand values of US$14 million and US$8 million respectively. Branding is essential for any business to thrive well.

Neo Group prides itself on its ability to cater for an event with a headcount of 500 people if given a minimum of just 3 hours’ notice. Not many caterers (if not, none) can meet such requests. The company has also created a record this year for the highest number of events catered for (1,118 orders) on the first day of the Lunar New Year.

In terms of the company’s catering operations, consistency and quality of food are not compromised and thus, each chef is designated to cook only one dish. Focus on quality helps to ensure that its customers will be satisfied with the food on offer.

The numbers

Let’s take a look at the financials of the business. The last-reported figures for Neo Group are for the financial year ended 31 January 2014.

FY 2013* FY 2014*
Revenue 41.7 52.4
Net profit 3.02 6.19
Net profit margin 7.2% 11.8%
Cash flow from operations 4.62 7.86
*Except for net profit margin, all other figures are in millions and in S$; FY2014 represents the financial year ended 31 January 2014 and so on

Source: Neo Group’s earnings

It’s easy to see how Neo Group’s revenue, net profit, net margins, and cash flow have all increased year-on-year. As of 31 January 2014, the firm had total borrowings of S$14.9 million versus a cash balance of S$8.5 million.

In contrast, Select Group (SGX: 5FQ), one of Neo Group’s publicly-listed competitors, saw its earnings drop by 60.1% year-on-year to S$1.6 million in its last-completed financial year. This happened despite Select Group’s top-line growing by 13.2% to S$131.4 million. Select Group ended the year with net margin of a mere 1.2%. The company is currently trading at a historical PE ratio of 31 and has a dividend yield of 1.9% at its current share price of S$0.36.

The catalysts

Neo Group plans to have 30 umisushi retail outlets up and running by 2016, either directly or through franchises. It also looking for further opportunities to grow its business in the Southeast Asian region through mergers and acquisitions locally and forming joint-ventures overseas.

Mr Neo Kah Kiat, Founder, Chairman, and CEO of Neo Group, said in the company’s FY2014 earnings release:

“We strongly believe that the food business is a sunrise industry and coupled with its recession-resistent and defensive nature, remains an attractive segment. To better capture the positive industry trends buoyed by favourable externalities – from an increasing propensity to spend on occasions and events and the expected completion of more HDB flats in 2014 and beyond – we have put in place plans to increase our kitchen capacity to cater to more guests per day. Our new centralised kitchen will offer three to four times increase in capacity, from 10,000 to 15,000 guests/day to 15,000 to 20,000 guests/day and provide greater economies of scale as we grow our business.”

With a new central kitchen, the catering outfit may see more cost effectiveness, improving net margins as a result. The increase in capacity to take on more business that comes with a centralised kitchen also shows management’s confidence in having even more sales in the future; it does not make sense to scale up to that level if management does not see growth in the years ahead.

Foolish Bottomline

Currently, the firm is valued at a historical PE (price/earnings) ratio of 21 and sports a dividend yield of 2.8%. Neo Group is committed to paying not less than 60% of its net profits as dividends till FY2015. Potential investors have to decide if paying around 20 times historical earnings is worth it for a company with good branding, astute management, and potential tailwinds.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.