Neo Group, while in a highly competitive F&B industry, is on the right path.
Firstly, it's primarily in the food catering business. Based on their last annual report ending Jan 2014, at least 65% of their revenue is from food catering. That's unlike Select Group, which has less than 30% of their revenue from food catering, also derived from their last annual report ending Dec 2013. Most of Select Group's revenue comes from their restaurant and food retail business.
From the Services Survey Series on F&B services conducted by the Department of Singapore for the year 2013, under key performance ratios, food caterers consistently ranked the highest among the various categories of F&B services.
Compared to restaurants, food caterers have average profitability ratio of 19.9% as compared to 4.8% restaurant. In addition, the earnings-expenditure ratio is 24.3% for food caterers while that for restaurants is 4.9%. While the data is only for 2013, it is clear that Neo Group's focus on food catering business will allow them to efficiently generate more profit per revenue as compared to Select Group.
Secondly, it's assessment that there is still room to grow in this industry is also correct in a way. Based on the same survey, the industry has grown at a average of 6% per annum from 2008 to 2013 using operating receipt growth as the method to calculate industry growth. While this percentage is not high, the important thing to note is that half of the 374 food caterers in 2013 are sole proprietorships/partnerships. While this means that there is a low barriers to entry for this business, it also means that the market is fragmented enough for a relatively large business like Neo Group which has scability to increase their market share over the years to come. Thus it will be important to see whether there is consolidation in the market like what Neo Group has stated and whether Neo Group's revenue will continue to grow at double-digit percentage.
http://www.singstat.gov.sg/docs/default-...nb2013.pdf
Lastly, Neo Group's market strategy to obtain more corporate clients and being the preferred caterers for venues are also in the right direction. Retail clients ultimately will be more price-sensitive than corporate clients given their considerable smaller budget and a more direct impact on their wallets. The % of sales from corporate clients for Neo Group has increased from 43% in the fiscal year ending Jan 2013 to 48% for the last fiscal year ending Jan 2014. Select Group on the otherhand, their revenue derived from institutional catering has actually declined by 3% over the almost same period (Select Group's fiscal year ends in Dec). By being the official caterers for venues like Star Vista Performing Arts Centre, Singapore Expo and even Costa Sands Resort in Pasir Ris, this could serve as another recurring revenue for Neo Group albeit a minuscle percentage at the moment.
At current PE ratio of 21x, it seems fair though definitely not undervalued. The key will be whether the revenue will continue to grow at a double-digit rate. If so, buying at the current price maybe a steal.
My point is that while F&B business is a cut-throat business, there are still sub-categories of such business that can earn good profits and Neo Group, being primarily a food caterer, is in the right sub-category. Neo Group and Select Group, while being food caterers, are also clearly moving in other directions. Neo Group is focused on its food catering business, with even their peripherary business like Umi Sushi and I Do Flowers & Gifts complementing the food catering business. Select Group is more focused on their restaurants and food retail business, which tends to have smaller profit margin given the cost of rental and so on. I believe after they have completed their centralized kitchen at Quality Road, their free cash flow will start to grow. However, when that will occur and whether there will be a change in business strategy is beyond my scope of knowledge.
(Not vested but monitoring)