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Has Neo Group Ltd Overstretched Itself?

Neo Group Ltd (SGX: 5UJ) was listed in July 2012. Since then, the company has been growing aggressively. It has expanded its food catering business and also acquired a number of companies, such as food manufacturer Thong Siek Holdings and vegetables and fruits trader CT Vegetables & Fruits.

This has resulted in Neo Group’s revenue leaping from just S$38.4 million in the 12 months ended 31 January 2012 to more than S$125 million in its fiscal year ended 31 March 2016 (FY2016).

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However, the company seems to have hit a roadblock. Its latest results – for the quarter ended 31 December 2016 –  showed an 89% year-on-year decline in profit attributable to shareholders to just S$564,000. Moreover, its net debt to equity ratio is at 170% while its interest coverage ratio has turned negative.

The latter is largely due to a much faster increase in the company’s cost of goods sold and employee benefits as compared to revenue.

But, Neo Group commented in its earnings release that the relocation of its food manufacturing business to a new facility (operations have commenced at the new site) will help the entire company  improve cost efficiencies and help it expand its offerings in the future. Management is also confident of Neo Group turning in a profit in its current fiscal year, but did warn that its industry’s outlook remains challenging.

Neo Group has already incurred S$1.6 million in interest expense for the first nine months of FY2017. The company’s free cash flow for the same period is also negative due to heavy investments made.

The company may need to think about ways of sustaining its growth instead of relying on debt to fuel its expansion. Given that banks in Singapore are likely to be more conservative today after a series of bankruptcy and restructuring cases in the oil and gas sector over the past year, it seems better for a company to not have to rely too much on the graces of its bankers.

Neo Group is currently trading at 4.2 times tangible book value and provides a 1.7% dividend yield. Its share price has fallen more than 40% since peaking at nearly S$1.00 in mid-2014.

But, the company’s share price is still above its listing price of S$0.30. An investor who has held onto Neo Group’s shares since the close of its trading debut would have obtained a total return of 39% (this includes gains from reinvested dividends), which is an annual return of roughly 7.6%.

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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 Stanley Lim does not owns shares in any companies mentioned above.