Neo Group’s sales shaken by rising operation cost

But it's still a 12% sales jump in 1H13.

According to CIMB, operating cost pressures were evident in Neo Group's 1H13 results. However, 1H13 sales still grew 12.0% yoy driven by growth in the food retail business under the “Umisushi” brand. There were 17 outlets as at end-July 2012 compared with 14 outlets as at 31 July 2011.

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During 1H13, other than the new food retail outlets and the outlet at Pioneer MRT station, sales from all existing food retail outlets increased by $0.77m (+25.6% yoy). On a positive note, the “Umisushi” brand turned profitable in 1H13.

The food catering business grew $0.33m or just 2.6% yoy in 1H13. The slower growth is due to seasonality factors as festivities in the second-half tend to result in higher sales contribution during that period. In addition, 1H13 did not include the full Lunar New Year peak as compared to 1HY12.

Various cost items saw significant increases. Key factors behind these cost increases were 1) higher food prices due to inflation, 2) IT system costs, 3) increase in headcount in the logistics and operations department, 4) higher advertising and promotional efforts to include private estates and promotional activities for members, 5) higher rental costs, and 6) higher water and electricity usage and the hike in water and electricity tariffs.

On a core basis, excluding the S$0.83m one-time IPO expenses, pre-tax profit would have been S$1.7m and the yoy decline in pre-tax profitability would be a less severe 10.2% versus the reported 53.6%.

NGL also declared an interim cash dividend of 0.49 Scts for 1H13 results. Note that this represents a 100% payout ratio based on its reported 1H13 net profit. The group aims to pay out at least 60% of its profits as dividends to shareholders for each year from FY13 to FY15.

We rate NGL a BUY with a target price of S$0.46, based on 8.3x CY14 earnings (30% discount to the Singapore restaurant sector average forward P/E of 11.9x).