Neo Group Ltd (SGX: 5UJ) is an integrated food solutions provider established in 1992. The group has four main business segments: food catering, food retail, food manufacturing, and suppliers and trading. Its food retail network spans 20 outlets islandwide, and the group has a trading network spanning 30 countries worldwide, supported by central kitchens, manufacturing facilities, and warehouses.
Neo Group’s IPO was in 2012, and since 2015, the group has engaged in various acquisitions to grow the business. These acquisitions are part of Neo’s goal of diversifying its food suppliers and opening up new lines of business, while also vertically integrating its core food catering business. Some acquisitions involved food manufacturing companies, while others involved add-ons to its catering business.
Investors may now be wondering, has Neo’s acquisition strategy borne fruit for the group?
Below is Neo’s acquisition history from 2017 until the present.
Source: Author’s compilation from SGXNet announcements
The total acquisition value stands at around S$11.5 million, with most of it satisfied by internal cash, and just a portion funded by the issuance of new Neo shares at S$0.57 per share. Investors should note that for the two food catering acquisitions (How’s Group and Lavish Dine), Neo took up a 51% stake rather than buying the whole business. Neo has also slowly increased its stake in Thong Siek Global, of which it first acquired a stake (55%) in 2015.
The acquisitions would have been funded mostly with debt as Neo’s balance sheet (as at 31 March 2019) shows a significant debt balance of S$76 million, with just S$19 million cash. Gross debt was thus around four times the cash held by the company, which is a cause for concern should the acquisitions not perform as well as expected.
Next, I turned to look at Neo’s segment performance in order to zoom in on how each segment was performing in FY 2019 and compared it to the prior year as well.
Source: Author’s compilation from Neo Group’s FY 2019 Earnings Announcement
From the above, we can observe that food catering division revenue had increased significantly from S$66 million in FY 2018 to S$81.7 million in FY 2019, with the increase attributable to the two food catering business acquisitions. However, note that the profit before tax (PBT) margin for the division declined from 10.1% to 8.7%.
The supplies and trading division saw a significant fall in revenue from S$45 million to S$32.3 million, but Neo managed to eke out a tiny profit before tax. The food manufacturing division saw flat revenue, but its PBT margin shrank from 3.0% to just 0.5%.
Acquisitions do not seem to be adding value
Judging from the numbers above, the acquisitions do not seem to be adding value to the group. Though food catering’s revenue has gone up, its margin has come down, which seems to suggest that higher costs are involved in integrating the acquisitions. The food manufacturing division is also seeing margins decline even though Neo is increasing its stake in Thong Siek.
Perhaps Neo needs to slow down on the acquisitions, take time to integrate each one into the group, and work on improving their operating performance. As debt levels are elevated, Neo should also try paying down some of its loans to reduce finance costs, as such costs will take a toll on the company’s bottom line. Investors need to see evidence of the group strengthening its balance sheet rather than continuing on with its acquisition spree.
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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 Royston Yang does not own shares in any of the companies mentioned.