Neo Group defends diversification plans, debt levels ahead of shareholder meeting

CATALIST-LISTED Neo Group is heading into the property business for new and recurring revenue streams, its board said on Wednesday, adding that the company is still looking for opportunities in its core catering and food manufacturing business.

Its board noted: "As we will be only in the early stages of the venture, we do not expect any immediate or significant change in the company's overall revenue mix."

The group was replying in a bourse filing to questions from shareholders, ahead of its annual general meeting and extraordinary general meeting (EGM) on Thursday.

Neo Group announced plans late last month to diversify into property development, investment and management, through a joint venture (JV) with Catalist-listed Boldtek.

But shareholders have asked whether Boldtek is "the best partner for Neo Group's new venture", citing the decrease in revenue and net loss that it recorded in FY2020.

The Neo Group directors replied that Boldtek was picked as a JV partner for its "networks and experience in the property business", although they declined to comment on Boldtek's financial performance.

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"Any potential opportunities undertaken by the joint-venture company will be based on our joint decision-making," the board added.

Should shareholders approve the diversification, Neo Group will hold a half-stake in the JV company, which will have an initial issued and paid-up share capital of S$1 million.

Neo Group does not face any liquidity or debt-refinancing issues, the board added, in response to a shareholder comment on its "continuous high gearing and the projected capital expenditure for FY2021". It pointed to a reduction in gearing from 1.91 times in FY2017 to 1.67 times in FY2020, which it said came on "strong operating cash flows".

"With the support of our lenders, we have been able to meet our financial commitments, and repay and refinance our debts with the banks to lower our interest expenses," it added.

On shareholder value, the board said that it does not plan to take any action to increase the liquidity of its shares, but may consider doing so in future.

When asked whether the group's dividend payout ratio will be raised from 11.6 per cent, the board replied that it "will be more confident in paying out more dividends to our shareholders when the group achieves higher profitability in the coming years".

In its core business, Neo Group plans to widen its catering market share by growing the number of brands. It also intends to expand product variety and raise capacity in the food-manufacturing business, where plants are running at 40 per cent capacity.

This is even as the board said that growth opportunities remain in the loss-making food retail segment, including potential for more retail concepts and stronger food delivery.

While the board said that Neo Group does not plan to set up cloud kitchens at its new headquarters, where construction progress has been delayed by Covid-19, "we may consider doing so in the future". It expects to move into the new premises by end-2021.

When asked by shareholders about the impact of the pandemic on its operations, the group said that safe-management measures have hit the traditional catering business, but "we benefited from the short-term dormitory contracts".

Meanwhile, food manufacturing booked 50 per cent growth in the supermarket and export business as demand for home-cooked and ready-to-eat products increased, it added.

Separately, Neo Group is carrying out an internal restructuring, under which wholly-owned U-Market Place Enterprise's frozen-meat business will be transferred to ERs Food. U-Market Place will focus instead on its traditional rice-dumpling business.