Why Did Neo Group Ltd Fall 8.9% Today?

Credit: University of Exeter

Catering outfit Neo Group Ltd (SGX: 5UJ) fell by 8.9% today to close at S$0.615.

Interestingly, there was no news today about the company and the Straits Times Index (SGX: ^STI) actually managed to inch up by 0.02%. So, what is happening to Neo Group?

Thing is, the company has not had a great run this year. Neo Group’s stock actually started 2015 at S$0.89; at its current price, it represents a 30% drop.

While Neo Group experienced a 77% year-on-year jump in revenue for the six months ended 30 September 2015, it actually suffered a loss for the period. This compares against a S$1.4 million profit in the same period a year ago.

The bulk of Neo Group’s increase in expenses came from purchases & consumables used. This might mean that the company is sacrificing its gross margin in search for higher volume in sales.

Furthermore, the company had taken on a significant amount of debt this year to fund its expansion and acquisitions. To the point, the company’s net debt to equity ratio had jumped from 52% on 31 March 2015 to 159% on 30 September 2015. With the higher borrowings, the firm’s finance costs also increased 290% in the six months ended 30 September 2015.

Fast growth in the past in both revenue and earnings might be reasons why  Neo Group’s shares have more than doubled from their 2012 listing price of S$0.30. But, with its earnings now reversing into losses, combined with the huge increase in leverage, it seems that investors are now less optimistic about the future of Neo Group.

The company currently trades at 4 times its book value and offers a dividend yield of 3.1%.

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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 Stanley Lim doesn’t own shares in any companies mentioned.