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Neo Group Ltd’s Latest Earnings: Revenue Soars, But at What Price?

Neo Group Ltd (SGX: 5UJ) reported its fiscal third-quarter earnings for the financial year ending 31 March 2016 (FY2016) yesterday. The reporting period was for 1 October 2015 to 31 December 2015.

Neo Group is a leading food and beverage (F&B) caterer in Singapore. Beyond its Food Catering segment, the firm also has a Food Retailing segment and a Food Manufacturing segment. You can read more about Neo Group in here or catch up with the results from the firm’s previous earnings here.

Financial highlights

The following’s a quick rundown on the latest financial figures for Neo Group:

  1. Revenue for the reporting quarter more than doubled compared to the same quarter a year ago, coming in at $37.8 million. Neo Group’s newly-incorporated Food Manufacturing subsidiaries, Thong Siek Holdings (TSH) and CT Vegetables (CTVeg), added $12.2 million and $2.9 million, respectively, to its top-line for the quarter.
  2. Profit for the period was $4.1 million, up over three-fold from the same quarter last year.
  3. Earnings per share (EPS) followed suit with a 255% increase to 3.34 cents in the reporting quarter, up from 0.94 cents a year ago.
  4. However, cash flow from operations was negative, coming in at $1.4 million in the red. Capital expenditure clocked in at around $2.7 million. This puts the F&B outfit in negative free cash flow territory to the tune of $4.1 million. It is also a big step back from a year ago when free cash flow was ‘just’ negative $0.86 million ($4.2 million in cash flow from operations and $5.0 million in capex).
  5. As of 31 December 2015, Neo Group had $7.5 million in cash and equivalents and borrowings of about $66 million. The group’s balance sheet has weakened from 31 March 2015 when it had $7.6 million in cash and equivalents and $20.2 million in debt.

Overall, Neo Group’s top-line has grown impressively, but the company’s acquisition binge has left it with negative free cash flow and a substantially weaker balance sheet.

Operational highlights

The Food Catering segment saw a 30.1% year-on-year increase in revenue to $17.85 million in FY2016’s third quarter. Neo Group attributed the segment’s top-line increase to its effective marketing efforts and the SG50 (50th anniversary of Singapore’s independence) celebrations.

The Food Retail segment’s revenue lagged with a marginal 3.4% increase year-on-year for the reporting quarter. The segment ended with $4.4 million in revenue. The segment, which has outlets selling Japanese food such as sashimi, was affected by adverse news coverage on the Group B Streptococcus bacteria infection cases that had taken place in Singapore in recent months.

Lastly, the Food Manufacturing segment logged in $12.2 million in revenue for the reporting quarter.

Neo Kah Kiat, the Founder, Chairman and Chief Executive Officer of Neo Group, added the following commentary for the current year and the outlook ahead:

“We have achieved a commendable performance mainly driven by robust growth of our core Food Catering business, lifted by a ‘dual-prong’ revenue growth – both organically and through strong contributions from our recent acquisitions. The results reflect the effectiveness of our focused business strategies, strong brand name and market leadership.

While the acquisitions of TSH Group and CTVeg Group are still relatively new, we are seeing a smooth progress in the integration of our processes to harness greater synergies and economies of scale. At the same time, we believe our enhanced vertically-integrated value chain sharpens our competitive edge, allowing us to better serve our customers by providing turnkey food and catering solutions. These efforts will lay the solid foundations for the Group’s long-term, sustainable growth.”

TSH will be moving to an enlarged facility which was acquired for $15 million recently. Neo added this thoughts behind the move:

“The enlarged facility will give TSH Group the additional production capacity it requires to meet the growing business demand, and a larger space necessary for greater automation of its processes to boost efficiency. The new premises also has a cold room facility that will generate substantial rental savings for TSH Group, apart from other operational cost savings, synergies and economies of scale it can benefit from the move.”

Foolish take away

At its closing price on Thursday of $0.61, Neo Group traded at around 10 times its trailing earnings.

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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.