Neo Group – Delivers the restaurant to you

Time flies. Do you remember when we were students, we have to gather
at the school assembly area to sing the National Anthem, school song and recite
the pledge?
Fast forward to now, as (adults) employees of a company, can you
imagine yourself reciting a company pledge and singing the company song? Neo
Group, a Singapore
company listed on the Catalist practices this culture. Against the backdrop of
such an interesting company culture, coupled with the positive industry
dynamics, I arranged an interview with Neo Group to have an in depth discussion
on the company’s business and prospects.
Below are key takeaways from my exclusive meeting with Mr Neo Kah
Kiat, Founder, Chairman & CEO and Ms Christine Quak, Assistant Director of
Marketing Communications, collectively “management”.
Food catering – three
segments, different target audience, same aim
With reference to Table 1
below, Neo Group has three brands, namely Neo Garden Catering, Orange Clove and
Deli Hub. Neo Group serves an average 10,000 headcounts per day and can serve
up to a maximum of 15,000 headcounts.
Table 1: Brands and target
audience

Source: Company prospectus
Food catering industry –
room to grow
According to Euromonitor, rising affluence and changing consumer
lifestyles continue to fuel the demand for social catering. For example, Singaporeans
are willing to pay in return for quality and convenience. There is increasing
demand for social catering for functions such as birthday parties, baby
showers, festive season gatherings and even wedding events. It is estimated
that growth in the overall events catering industry (comprises of social and
corporate catering) is likely to grow at a compound annual growth rate of 12.9%
from 2012 – 2014. (See Table 2)
Table 2: Industry growth
In addition, based on 2011 sales, the top five events caterers in
Singapore only command about 21.6% market share with Neo Group, leading the
pack with 9.0% market share. The next largest competitor is Select Group which
commands a 4.7% market share. Thus, in such fragmented industry, management
believes that there is room to grow through acquisitions, joint ventures and /
or strategic alliances.
Barriers to entry
(actually) exist for food catering
Most people would think that there are no significant barriers to
entry for events caterers. However, management emphasized that contrary to what
most people think, barriers to entry exist for events caterers, especially for
those caterers who wish to grow beyond the size of S$5m.
Firstly, events catering is a labour intensive business. With the
reduction of Dependency Ratio Ceiling (“DRC”) for the services sector from 50%
to 45%, for every ten Singaporeans or permanent resident employees, companies
can only employ eight foreign workers, two less than before the enactment of
DRC. This is likely to compound the labour problems faced by event caterers,
especially for those who wish to scale up their business.
Secondly, for a company to expand, management believes it is a prerequisite
to have robust information technology (“IT”) systems to ensure seamless
transition from marketing, sales, kitchen, delivery and after sales customer
services. However, the costs of such IT systems are likely to preclude some
players from purchasing them.
Thirdly, the presence of entrenched incumbents in the industry also
serves as deterrence for new entrants. Most consumers are likely to employ the
services of established players due to their reputation and services and few
may explore the services of new entrants especially for important events such
as marriage and baby showers.
Fourthly, with the new NEA’s time stamping regulation, effective 15
Feb 2012, food caterers have to purchase expensive time stamping machines. Similar
to IT systems, such expenses may discourage new entrants from entering into the
food catering industry.
Last but not least, the repetitive, mundane nature of the work,
coupled with long working hours increases the difficulty for employees to stay
motivated and maintain job satisfaction leading to high turnover rate.
In a nutshell, all of the above factors serve as barriers to entry
for new entrants and also barriers for small existing players to scale up their
operations.
What’s in the pipeline?
Firstly, management intends to redevelop the property at 30B Quality Road to
consolidate most of their central kitchens, offices, logistics and warehouses
so as to increase efficiency. The redevelopment, expected to commence in
1Q2013, is to be gradually completed over the next three years. When fully
operational, this is likely to increase their capacity to 30,000 headcounts a
day. I also enquired on their current utilization rate and am assured that they
are currently operating at about 55% utilization rate. In other words, they are
still able to grow organically in the near term, without the additional
capacity from the proposed development at 30B Quality Road.
Secondly, management targets to expand their food retail business by
increasing the number of Umisushi from 16 to 30 outlets by 2016. Management is
optimistic about this business segment as they believe it complements their
food catering business. Furthermore, with the increasing shift in consumer
preference for convenience food, management believes their Umisushi retail
outlets would bridge these consumer needs.
Thirdly, management believes there are still untapped opportunities for
food catering business such as institutions, yacht catering etc. Consequently,
management remains sanguine on their business prospects.



Intends to distribute
>=60% of net profits as dividends for next 3 years
Barring unforeseen circumstances, company intends to recommend and
distribute not less than 60% of net profits as dividends for the next three
financial years.
Unique company culture
unites employees
I also enquired on their company pledge. Management affirms that all
the employees have to recite a daily pledge. They also have a company song. In
addition, they have monthly sports day, as well as, birthday celebrations for
their employees. Management wants their employees to be happy and enjoy working
with them. This also helps their employees to maintain a high level of job
satisfaction.
Some noteworthy points
to consider
Notwithstanding the above points, below are some noteworthy points
for investors to consider which I drew reference from its prospectus.
a)     
Higher financing costs in
FY13F, compared to FY12 as the Group took up a bank loan of about S$7.04m for
the acquisition of the property at 30B Quality Road;
b)     
Higher expenses in FY13F,
compared to FY12 due to compliance costs as a listed company and listing
expenses;
c)     
FY12 results were boosted by the
sales recognized from two Lunar New Year peaks occurring in that financial
year. This will not recur in FY13F.
Conclusion: time is the
judge
Neo Group closed at $0.300 on 24 Aug 12. It was listed on 11 Jul 12
and hit an intraday high of $0.490 on debut (IPO price was $0.300). As with most
investments, especially newly listed ones, time is required for the investment
community to fully understand the company and for the company to deliver
results on a sustainable basis. If Neo Group can consistently deliver results
as reliably as it caters food to the consumers, it is likely that the
investment community would appreciate the company and its stock in due course.

P.S: This was first published on sharesinv.com. 

Readers who are interested can email me at crclk@yahoo.com.sg for a pdf version (complete with Tables 1 & 2) and analyst reports on Neo Group.

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