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Neo Group to develop multiple income streams; expand along whole supply chain

Samantha Chiew & Lim Hui Jie
Samantha Chiew & Lim Hui Jie10/2/2020 07:00 AM GMT+08  • 8 min read
Neo Group to develop multiple income streams; expand along whole supply chain
Neo Group plans to expand along the whole F&B chain
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The Covid-19 pandemic has reaffirmed the commitment by Neo Group to expand its different business segments, develop multiple revenue streams and not to be overly dependent on any one of them.

With safe management measures and the ban on large-scale events and conferences still in place, the integrated food solutions provider is bracing for a prolonged dip in catering sales.

In 4QFY2020 ended March, Neo Group reported an 86% drop in earnings to $0.6 million from a year ago on the back of a 13.6% drop in revenue to $44 million. Revenue from food catering plunged 17.1% to $21.5 million due to the cancellation of corporate events. Revenue from food manufacturing was up 3%.

For FY2020 though, the group reported 17.3% higher earnings of $6.3 million from a year ago due to strong growth in the first three quarters while revenue increased 2.7% to $185.9 million. The main food catering business posted a 13.1% rise in revenue to $92.5 million due to higher recurring income from childcare and eldercare market segments as well as organic growth from its tingkat or tiffin home meals delivery business. Revenue from manufacturing was down 0.6% to $48.6 million. Yet, PBT for revenue surged more than sixfold due to better workflow and automation.

Thanks to its diversification efforts, Neo Group is able to generate growth from other businesses to pick up some slack despite the pandemic. For example, with more people staying at home and working from home, the group saw an increase in tingkat sales. “The tingkat business delivers food with that home-cooked taste that is also nourishing and healthy straight to one’s doorstep,” Neo Group founder, chairman and CEO Neo Kah Kiat tells The Edge Singapore in an interview. He adds the group saw a three-fold increase in orders to “nearly 10,000 orders” per day during Singapore’s “circuit breaker” period.

Although some restaurants offered delivery services during the lockdown, Neo says, “You can’t be eating restaurant food everyday. It’s too rich. Also, tingkat meals are more affordable at about $6 per meal per person, which is the equivalent of a delivery fee for some restaurants.”

Current focus

While waiting for the Covid-19 pandemic to blow over, Neo Group plans to focus on growing market share of its tingkat business and pursue institutional catering, especially in the childcare and elderly segments. It also plans to expand the range of cuisine and catering options beyond the current party-sharing sets, lunch boxes, bento sets and takeaway meals.

Apart from catering and manufacturing, Neo Group has three other smaller business segments — supplies and trading, retail, as well as other businesses. In FY2020, the three segments saw revenue decreased by 11%, 11.4% and 10.8% to $32.3 million, $15.0 million and $2.2 million respectively.

The supplies and trading segments comprises a 49% stake in wholesaler and food processing company ER Group, which owns a 60,000 sq ft premise with enough cold room space to accommodate 3,000 pallets.

The retail division comprises F&B outlets under brands such as umisushi, Kim Choo Kid, issho izakaya, DoDo Express and Joo Chiat Kim Choo — all of which saw a significant drop in footfall during the circuit breaker period. Other businesses include its custom gift and floral solutions provider I DO Flowers & Gifts and confectionary Choz.

On July 24, Neo increased his total stake in the company via two separate married deals. In the first tranche, he acquired 453,300 shares for $190,386 and in the second tranche, he acquired 2.2 million shares for $924,000. That works out to an average price of 42 cents per share. He now controls some 81.5% of the company.

When asked why the sudden share buyback interest, Neo says, “I found that the shares were trading at a PE ratio that was too low.” Although holding such a high amount of stake makes it easy for Neo to delist the company, he says there are no plans to do so. “I still enjoy this platform and I have bigger and more plans for the company.”

Early days

Back in the 1990s, when fax machines were the fastest way to distribute brochures and the business directory was a thick book with yellow pages, Neo would spend afternoons flipping through it and faxing flyers to companies to hawk his catering services. After he was done faxing, he would then go help cook the food, before personally delivering them to customers all around Singapore.

Fast forward to today, Neo Group is reportedly the biggest catering company in Singapore, with a 20% market share. The group has 15 catering brands serving different markets. Among them, flagship Neo Garden provides buffets for large events, Lavish Dine offers fine dining in a more intimate setting while Neo’s tingkat delivery service caters to the family and Madam Kim is available to serve nourishing soups to new mothers in confinement.

Although catering may be its main revenue driver for now, Neo sees this changing as his business expands. “Growth of our manufacturing business will soon surpass our catering business because our branding and quality is recognised and there is room for growth,” says Neo.

In May 2015, Neo Group ventured into manufacturing by acquiring a 55% stake in Thong Siek Holdings, which produces and distributes surimi-based seafood products, including DoDo, the household brand of fishballs. In FY2016, Thong Siek’s manufacturing arm contributed $37.3 million in revenue, or 30% of Neo Group’s overall revenue, in its first 10 months. Since then, revenue contribution from manufacturing has stayed at that level although Neo expects this to increase with time.

M&A plans

The future of Neo Group may look like this: If you order the next company buffet from them, the ingredients of the dishes could come from a farm that Neo Group owned, which are then processed in one of their manufacturing plants, then cooked in a Neo Group central kitchen in a building that they own, before being transported by a Neo Group delivery van straight to your office.

Neo says the group can achieve this through M&As. “In my view, M&As are like oxygen to Neo Group. But the group needs to expand locally first until we are big enough for overseas acquisitions. And those that we acquire overseas must be bigger [than what we have previously acquired],” he says.

For now, Neo’s M&A targets will have to be — first and foremost — profitable. “Previously, we acquired companies that have good branding, but lower profitability. Moving forward, profitability should come first and it has to have a good future and management team.”

And leading the group’s overseas expansion will be the manufacturing segment. Currently, the company’s surimi or fish paste products are being exported and distributed to several countries via a third-party distributor to save on logistics. Neo plans to have a network of offices all around the world, each acting as what he calls a “showroom.” These offices will promote the Dodo brand of fishballs, which have been in the global market for about 20 years.

According to Neo, he now supplies more than 30 containers a year of surimi products to Malaysia and Australia, while America is also a huge market for surimi products like fishballs and crabsticks. Ideally, Neo aims to grow the group from its current size of 17 catering brands to 30. He also intends to use its central kitchens to achieve economies of scale and cost savings.

The company is in the process of moving into its new headquarters at 30B Quality Road, just around the corner from its current one at Enterprise Road. The 300,000 sq ft, 10-storey facility will also consolidate all the group’s operations under one roof once it is completed in 4Q2021. The facility will house the corporate office, R&D centre, central kitchens of its various food business segments and warehousing facilities. It will also be fully automated.

Aside from that, Neo notes that the pandemic has caused desperate property owners to drop their rents as they scramble to fill vacant spaces. With that, he plans to expand the retail segment, introducing more brands and concepts. “We cannot just rely on one umisushi brand to survive,” says Neo, who is looking into fast food and Peranakan food.

The company has plans to exert wider yet tighter control over its supply chain. For now, it has a manufacturing arm, a central kitchen, and its own fleet of delivery services. This reduces the chance of a disruption along the supply chain which is beyond the group’s control. Looking ahead, Neo hopes to take the company further upstream, into the agricultural business. But this will have to wait until the Covid-19 pandemic blows over.

Most recently, Neo Group announced plans to diversify into the property segment via a joint venture with listed peer Boldtek Holdings. Through property development, the group hopes to diversify its revenue stream as well as expand its retail segment to take full control over rents as it becomes its own landlord.

Although Neo Group is currently not covered under any research house, Phillip Securities’ senior research analyst Terence Chua has some doubts about the group’s diversification at a time like this. “Even though Neo Group listed certain synergies from their diversification into property development, companies that expand out of their core business rarely perform well as this is outside of their core competency, increasing the execution risk,” says Chua.

With Neo Group’s improved FY2020 earnings, its stock has gained 8.3% year to date to close at 46 cents on Sept 29. At this level, the company is trading at 15.9 times historical earnings and has a market value of $67 million. The stock was listed back in 2012 at an IPO price of 30 cents.

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