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2 Future Questions for this Potential Growth Company

Credit: Ethan Lofton

Neo Group Ltd (SGX: 5UJ) came public in 11 July 2012 at S$0.30 a share and has since recorded 210% returns from share price growth alone. The food catering and food retail company reported its earnings yesterday, and my fellow Fool Sudhan covered the details of the report here. Meanwhile, a trio of Fools attended the media and analyst briefing organized by the company. In the spirit of looking into the future, I would like to add two things to look out for in the company for the coming years.

1. Will the increase in employee expense lead to more profitable growth?

For the six months ended 31 July 2014 (1H’15), the company’s revenue grew to S$28 million from S$23.1 million in the previous corresponding reporting period a year ago(1H’14). Said another way, the revenue increase was about S$4.9 million.

At the same time, Neo Group’s employee benefits expense grew by S$2.4 million – or a little under half of the revenue increase. Partly as a result, Neo Group’s net profit had slid by 9.1% to S$2.5 million from S$2.8 million a year ago.

The employee benefits expense had increased partly due to the addition of sales personnel who would be targeting the corporate catering market. Elvis Lee, Executive Director for Business Development for Neo Group,  outlined the company’s industry-focused sales strategy during the briefing. He also touched on Neo Group’s intention to grow the sales team over time.

As such, we should look out for the company’s ability to scale corporate sales in the catering division faster than expenses for the years ahead.

2. How will the food retail business develop?

Sales for the Food Retail business division excelled in 1H’15, increasing 29.9% year-on-year – that tops the 17% growth in the Food Catering division.

The umisushi franchise under the division currently has 25 outlets in Singapore, with 2 more in the pipeline. The company has set a target of 30 outlets by 2016, so at the current pace of expansion, it would seem like Neo Group’s 2016 goal will be exceeded soon. On top of that, the company is also moving towards higher priced bento set and increasing seating area for its new umisushi outlets.

Elsewhere, the company is also experimenting with two casual dining restaurant formats in issho izakaya and NANAMI Udon. From the words of Chief Executive Officer Neo Kah Kiat, these concepts are currently just in the “testing” phase and most of the attention is still on the catering side of the business. Additionally, he took time to point out that the less-discussed NKK Food and Catering Supplies division has helped provide the company with a competitive cost advantage from buying directly from seafood suppliers around South East Asia and China. In the meantime, there is one single umisushi franchise in Indonesia which does not directly enjoy the leverage from the NKK division located in Singapore.

Overtime, a long-term goal (no time-lines were given) of the company is to have 100 retail outlets globally.

As such, we might want to keep our Foolish eyes on profitable growth of the Food Retail segment, and potentially, an expansion of the NKK division to overseas further down the line. The same store sales growth of the Food Retail segment, though, seems to have stalled (no figures provided). So, it’s worth watching for the durability of the revenue growth as well.

Foolish bottom line

As lifelong students of Foolish long term investing, it pays to learn about the company over time as it develops itself for the future. Neo Group currently has a market capitalization of around S$133 million. Patience is needed as the company scales up over the next few years.

Foolish investors might take heart that if the company turns out to be a long term winner over the next decade, history has shown that there will opportunities to add over time. 

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.