Stock Market Today:Neo Group's profitability ahead hinges on food catering segment

RHB has downgraded its call on Neo Group from buy to neutral, lowering its target price on the stock to 61 cents from 80 cents previously on a weaker outlook for Singapore's food catering industry.

Neo Group, whose business is mainly in food catering, yesterday reported a 3Q17 earnings fall from $4.8 million in 3Q16 to just $0.1 million in the absence of a one-time gain.

In a report on Friday, RHB analyst Juliana Cai says she suspects the group's market share had declined during the quarter, based on the 6.5% fall in revenue reported in its latest set of results despite a y-o-y rebound in food catering sales in Oct and Nov 2016 of 5.8% and 7.4% respectively.

We note that topline for [the food catering segment] fell 3.6% for 9MFY17 (Mar) on the absence of SG50 celebrations. Going into 2017, we think the slowdown in Singapore's economy would result in further tightening of recreational budgets for both corporate and private social events," says the analyst.

Although Neo Group's food manufacturing arm has shown improvement by turning operationally profitable for the quarter thanks to the revival of the group's DoDo brand of fishballs, she believes some of the cost savings will be delayed in this segment as the transfer of operations to the group's new premise at 22 Senoko Way is expected to take place over the course of 2017.

As such, the research house as cut its FY17F-19F earnings estimates for the group by about 45% per annum, especially since it now expects muted growth and weaker margins in the food catering business.

We expect the growth of its other segments - with lower margins - to also pull down the group's overall profitability, Cai adds. As at 10.12am, shares of Neo Group are trading flat at 57.5 cents.

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