The pandemic has not been kind to food caterers.

Even with the Phase II reopening, guests have been limited to five per household at most.

For Neo Group Limited (SGX: 5UJ), an integrated food solutions provider, the going has not been easy.

For the fourth quarter ended 31 March 2020, revenue fell by 13.6% year on year to S$43.9 million, while profit attributable to shareholders plunged by 86% to S$0.6 million.

However, results for the full year still looked healthy, with revenue inching up 2.7% year on year and net profit climbing by 17.3% year on year to S$6.3 million.

A buffet spread of food businesses

Neo Group has four different divisions – food catering, food retail, food manufacturing and supplies & trading.

Food catering made up the bulk of revenue at 50% for the fiscal year, and also generated the lion’s share of profit before tax at S$10 million.

Recently, the group announced that it will form a joint venture to diversify its business into property development and management.

But is this a wise move by the company?

Can the business benefit from this proposed diversification?

The salient details

Let’s look into the details of the announcement.

Neo Group has, on 28 August, entered into a joint venture (JV) agreement with Boldtek Holdings Ltd (SGX: 5VI), or BHL, to carry out the activities of property development, investment and management.

BHL’s principal business is the provision of construction services, interior decoration and fit-out services in Singapore. It also operates a precast manufacturing plant in Johor, Malaysia.

The proposed activities for Neo Group’sdiversification are wide-ranging. It may include the acquisition and development of residential, industrial or other types of properties, as well as investment in property-related assets.

The rationale for the transaction is to add on additional recurrent income streams from a new business line which may include both rental income and/or management fees relating to real estate.

Another stated reason was to reduce reliance on its current business, as people’s tastes and preference with regards to food can be fickle.

Neo Group will own a 50% stake in the JV company and pump in a total of S$500,000 as share capital.

Analysing its core business

Many investors may have heard of Neo Group and its various catering brands.

The catering arm operates Neo Garden, Orange Clove and Deli Hub to cater to the mass market, premium and halal segments, respectively.

The division also provides a tingkat service that delivers food to full meals to households daily.

According to a Euromonitor International report, Neo Group is Singapore’s number one events caterer for nine consecutive years since 2011.

In fact, the group has increased its market share from 16.8% in 2018 to 20.5% in 2019.

Investors should note that Neo Group saw a 13.2% year on year increase in revenue for its catering arm from S$82.8 million to S$99 million.

Profit before tax for this division rose by 38.7% year on year from S$7.2 million to almost S$10 million.

The above facts demonstrate Neo Group’s strong market position in the catering industry, with the division boasting a healthy profit before tax margin of 10.8%.

Relying on its JV partner?

The question boils down to: why is the company seeking to diversify its revenue streams when its catering arm is doing so well?

One possible reason could be due to the COVID-19 pandemic.

With the Meetings, Incentives, Conventions and Events (MICE) industry taking a huge hit due to border closures and travel bans, events catering revenue will likely remain weak for the foreseeable future.

Catering for events such as weddings or baby showers has also been made tougher with new rules on social distancing.

It should be noted that Neo Group has no prior expertise in property management, investment or development.

The implication, therefore, is that the JV will rely heavily on the experience and expertise of BHL.

A quick check on BHL’s latest earnings shows that the construction group incurred a loss of S$3.6 million even as revenue plummeted by 30.5% year on year.

Get Smart: The jury is out for now

The JV has yet to identify potential targets for acquisition or development.

It’s important to note that real estate has not been immune to the pandemic.

Real estate stocks have seen their prospects dimmed due to tough challenges caused by the pandemic.

Hence, the diversification may end up being a case of jumping out of the frying pan and into the fire.

We will have to continue to monitor future corporate developments relating to the new JV and diversification attempt.

For now, the jury is out as to whether the diversification is a good idea, or not.

What we can conclude is that management is aware of the potential risks relating to its core business, and has positioned itself to adapt to the new conditions, which is a positive.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.