Writing this post makes me hungry (Select Group Ltd & Neo Group Ltd)

I have previously written a post on Neo Group.

Neo Group Ltd (Time to buy?) (read here)

A reader has asked me about my thought on Select Group as compared to Neo Group.

For the food & beverage (F&B) businesses listed in the Singapore market, there are three companies competing with each other: Neo Group Ltd (SGX: 5UJ), Select Group Limited (SGX: 5FQ) and ABR Holdings Limited (SGX: 533). Indeed, in a nation obsessed with food, the F&B business is big business here.

Select Group Limited: The Group manages thousands of dedicated staff trained in all aspects of the food service industry. With their extensive experience in the F&B industry, the Group has established a substantial brand presence in Chinese fine dining, events catering, institutional catering, Thai casual dining, themed food courts, quick service restaurant as well as Hong Kong dessert chain.

Neo Group Limited: Events-catering outfit Neo Group was listed back in 11 July 2012. Backed by a track record of 22 years, Neo Group Limited is a leading catering group with some of the most recognised brand names in Singapore. Under their Food Catering business, the Group supplies a comprehensive range of quality food and buffets. Under their Food Retail business, the Group operates a chain of 22 “umisushi” food retail outlets islandwide and 1 licensed outlet in Jakarta as at 31 January 2014, offering Japanese convenience foods as well as delivery services.

In comparing the two companies: one can see that Neo Group derives most of it revenue (74% to be exact) from Food Catering. On the other hand, Select Group has a more diversified breakdown, with the majority of revenue coming from Peach Garden (26.9%) and Food Retail (20.6%). In contrast, Food Catering contributes only 16.1%.

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.

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. In fact, Neo Group’s “umisushi” food retail outlets are not full-service restaurants (occupy less space and hence less rental incurred) and has a buy and takeaway concept (Japanese quick service restaurant).

A quick glance at the financial statistics of the two companies (see above) reveals the following:

1. Neo Group Limited share price appears to be more overvalued as compared to Select Group Limited’s, as the P/E ratio is higher and price to book value is higher.
2. In terms of profitability, it is hard to tell the two apart. Their ROEs are almost on par, while Neo Group appears to be more efficient as its ROA is higher. This is probably due to the fact that most of its revenue comes from Food Catering services & Food retail, while Select Group’s revenue is mostly from Peach Garden.
3. In terms of leverage, Neo Group’s figure appears better. Select Group’s Current Ratio is not healthy (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses.).

Let’s look at the financial performance of these two companies over the years. However as Neo Group Ltd is only recently listed in the Singapore Market, its track record is relatively short.

Let’s start with considering the downside risk first – eg. debt/leverage. I want to be sure that debt is not getting bigger.

Note: Current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm’s current assets to its current liabilities.

Over the years, the financial leverage of Select Group has been trending upwards (not a good sign), while current ratio has been trending downwards (also not a good sign). On the other hand, Neo Group’s leverage has been trending downwards (good sign but it is a short history), while current ratio seems to be moving up (a good sign).

Next let’s look at their profits, earnings and free cash flow over the years.

Both Select Group and Neo Group’s gross profit has been trending upwards over the years. However, Select Group’s EPS is seen to be trending upwards, while Neo Group’s EPS is trending downwards. Equally worrying is that both their free cash flows are trending downwards.

Now let’s see if they have been generous in rewarding their share holders via dividends.

Not much can be gathered from these two charts (only have 3 years’ data here).

Narrative and outlook wise:

Select Group seems to be focusing on increasing the level of productivity within the Group:

• The introduction of automation equipment at some of our operating outlets and central kitchen.
• As at January 2015, their new 8-storey building was already 55% completed (two levels of the building would be dedicated to ready-meal and ready-sauce production, which would include the R&D division, business development unit and equipment capability team).

Neo Group has been making headlines in recent times and is very aggressive in their expansion:

• Aim to increase our customer base for the corporate client segment, capitalizing on the vibrant Meetings, Incentives, Conferences, and Exhibitions (“MICE”) market in Singapore.
• Recently acquired the famous DoDo fish balls business, is now planning to open a new central kitchen facility at Quality Road.
• Neo Group’s new central kitchen and corporate headquarters at 1 Enterprise Road became fully operational in November (new centralized kitchen will offer three to four times increase in capacity, from 10,000 to 15,000 guests/day to 15,000 to 20,000 guests/day). Already the group is planning another facility at 30B Quality Road to enable it to cater to 50,000 people a day, up from the existing 30,000. The project is still pending JTC Corporation’s approval.

In with just 10% of a S$363 million events catering market, Neo Group clearly has a huge runway in front of it. (read here)

In summary:

The food business in Singapore is a sunrise industry. Being coupled with a recession-resistant and defensive nature, it remains an attractive segment. In time-starved family, food catering, retail and restaurants business seem to be the way to go.

Although the current share price of Neo Group may be seen more over-valued as compared to Select Group’s, Neo Group does have its strengths.

Despite its short history in the Singapore Stock Market, its ROA and leverage figures appear to be stronger. Over the years, leverage for Neo Group has been trending down.

The calculated trailing PEG and Intrinsic Value show that the share price appears to be a bargain (read here).  However, as Neo Group is only recently listed in the Singapore Stock Market, one would need a bigger margin of safety. I would need a bigger buffer between intrinsic value and stock price to consider it a bargain.

Nevertheless, Neo Group’s financial figures are not perfectly pristine. Neo Group’s free cash flow seems to be diving (although profit is increasing) probably due to the aggressive expansion.

Narrative wise, Neo Group seems to be heading in the right direction with its focus on the Food Catering segment which has a relatively high profitability ratio. It is also boldly venturing overseas (read here).