Can This 210% Winner Continue Growing?

Since its listing in July 2012 at S$0.30 apiece, events caterer Neo Group Ltd (SGX: 5UJ) has already surged by 210% to S$0.93 as of yesterday’s close. That return has absolutely smoked the Straits Times Index’s (SGX: ^STI) gain of around 10% in the same period.

Given its market-beating performance thus far, can Neo Group continue delivering great returns for its investors? That can be a tough question to answer (and no – extrapolation of past returns is not the way to go!). Fortunately, super investor Peter Lynch had shared a very useful investing checklist in his book “One Up On Wall Street”. Let’s use that to help give us some answers for our question.

1. The Price-Earnings Ratio: Is it low or high for this particular company and for similar companies in the same industry? (Generally, low PEs are preferred)

Currently, the SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index, carries a trailing PE ratio of around 14. Neo Group, on the other hand, is valued at 22 times its trailing earnings.

Given Neo Group’s business of running food catering services and Japanese food retail outlets, some similar companies could include Select Group Limited (SGX: 5FQ), Japan Foods Holding Ltd (SGX: 5OI), and Sakae Holdings Ltd (SGX: 5DO).

Company Price Trailing PE ratio
Select Group S$0.425 22
Japan Foods S$0.615 15
Sakae Holdings S$0.63 18

Source: S&P Capital IQ

With the figures above, we can see that Neo Group carries a PE ratio which is generally higher than that of both the market and its peers.

2. What is the percentage of institutional ownership? The lower the better

Lynch’s main reason for considering this factor is because he believed that companies which flew under the radar of big investors (the institutional investors) tended to offer better bargains due to a lack of coverage and interest from the market.

In Neo Group’s case, there really isn’t much room for institutional investors to own a meaningful stake in the company – Neo Kah Kiat, who’s the Founder, Chairman, and Chief Executive of the company, controls almost three quarters of its shares.

3. Are insiders buying and whether the company itself is buying back its own shares? Both are good signs.

If insiders and/or the company itself is buying, it could be a sign that the share may be undervalued.

A quick glance at Neo Group’s regulatory filings over the past three months reveals that Neo Kah Kiat had recently bought 375,000 shares of Neo Group for around S$0.99 each. The purchase was made just last week on 12 September 2014.

4. What is the record of earnings growth and whether the earnings are sporadic or consistent?

Financial year ended 31 January Net income (S$, million) Year-on-year change
2010 2.2
2011 2.8 26%
2012 5.4 9%
2013 3.0 -44%
2014 6.4 112%

Source: S&P Capital IQ

As Neo Group only got listed a couple of years back, there are no long records of its profitability. But from the data we can work with, the company has been able to showcase consistent profitability.

The only snag is that the growth in its earnings have not been that smooth, though there’s still clear signs of growing earnings.

5. Does the company have a strong balance sheet?

Based on its latest financials as of 31 July 2014, Neo Group carried S$9.2 million in cash and S$19.5 million in total borrowings. That’s not exactly a strong balance sheet.

6. Does the company have room to grow?

The research outfit Euromonitor had pegged Singapore’s events catering market to be about S$307 million in size in 2011. Euromonitor also estimated the market to be able to grow by 12.9% per year between 2012 and 2014. Some simple math would thus put the events catering market in Singapore to be worth more than S$400 million today.

Given that Neo Group’s catering businesses brought in a collective S$39 million in sales in FY2014 (financial year ended 31 January 2014), there seems to be some significant headroom for growth for the company even if Singapore’s events catering market had remained stagnant since 2011.

Neo Group’s food retail business also seems to have healthy room for growth – revenue in the segment had jumped by 29.9% year-on-year for the six months ended 31 July 2014.

Foolish Bottom Line

To sum it all up, Neo Group has ticked a number of boxes: It has low institutional ownership; insiders have been buying back some shares; it has been consistently profitable; and finally, it does seem to have huge room for growth.

So, can its shares continue their winning ways in the future? Unfortunately, we still can’t come to a definitive conclusion. As useful as Lynch’s checklist is, there are still important considerations we have to think about. What’s Neo Group’s competitive advantage in relation to its industry peers? Does management have a track record of solid business execution and do they seem to be trustworthy people? These are just some of the further questions we have to answer before we can make an investing decision.

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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 writer Chong Ser Jing owns shares in Neo Group and Japan Foods Holding.