SINGAPORE (Feb 9): RHB is maintaining its “neutral” call on Neo Group with a target price of 64 cents, given the group’s 3Q18 results came in line with the house's expectations.

3Q18 earnings surged to $2.08 million from $0.13 million in 2Q18. During 2Q18, the group recorded a one-off loss on the disposal of 14 Senoko way for $5.2 million.

See: Neo Group's 3Q earnings surge to $2.08 mil on absence of one-off loss

Revenue dropped 4.2% to $44.7 million from $46.7 million a year ago, due to the group’s food retail, supplies and trading divisions although this was offset by an increase in the food catering and food manufacturing divisions.

Advertising expenses were 43.6% lower at $0.83 million, while other expenses were 60.2% lower at $3.07 million.

The group also recorded a one-off loss in 3Q18 on the disposal of 475 Tampines Street 44 #01-129 of $0.02 million.

Key drag though was newly acquired subsidiary U Market, which saw 3Q18 losses widened to $1.1 million, from a loss of $0.5 million in 2Q18.

In a Thursday report, analyst Juliana Cai says, “We do not see this as a major issue as management has put forth cost-cutting initiatives to turn this subsidiary.”

The group’s management has also mentioned that it plans to turn the business around by consolidating the operations to its headquarters office and leasing cold-rooms at lower rental rates.

The analyst is confident that the business should start making profits in FY19, as the group has a track record of turning around its food manufacturing arm, Thong Siek Group.

However, the analyst does not like the group’s net current liability position and its high net gearing ratio of 1.6 times, which is very risky in the current rising rate environment.

“While Neo Group could improve its current ratio by refinancing some of its shorter term debt with longer term borrowings, we think the group still needs at least 2-3 years of spectacular results to bring down its net gearing ratio to a more reasonable level,” says Cai.

Since the founder-cum-CEO, Neo Kah Kiat, and his wife collectively own about 75% of Neo Group, Cai suggests that the group could place out a maximum of 50% more shares to raise funds.

Alternatively, the group could also list some of its businesses to unlock value and recycle its capital.

As at 11.26 am, shares in Neo Group are trading 1 cent lower at 66 cents or 21.7 times FY18 recurring earnings with a dividend yield of 1.5%.