Dear all

Since Mr Lawrence Wong took over as Prime Minister on 15 May, rumours are rife that an election is imminent, perhaps as early as Sep 2024. ISOTeam comes to my mind as it is typically a beneficiary, especially before and after election.

 

What does ISOTeam do?

Founded in 1998 and listed on Catalist of the SGX on 12 July 2013, ISOTeam Ltd. is an established and eco-conscious player in Singapore’s building, maintenance and estate upgrading industry with more than 20 years of Repairs & Redecoration (R&R) and Addition & Alteration (A&A) experience.

ISOTeam has successfully undertaken more than 860 refurbishment and upgrading projects for over 7,200 buildings and counting since inception. ISOTeam also offers specialist Coating & Painting (C&P) services as well as complementary niche services (Others) including specialist waterproofing, commercial interior design and home retrofitting (ID), landscaping, mechanical and electrical works (M&E), vector control services and handyman services. ISOTeam’s major customers include town councils, government bodies, and private sector building owners. For more information, please visit their company website HERE.

Below are some interesting noteworthy points compiled based on my own observation, research, and interaction with ISOTeam’s management.

 

Some interesting noteworthy points

a) Bullish chart

ISOTeam’s chart is rather bullish (See Chart 1 below). It has breached its four-year downtrend line on 27 May 2024. Since 26 Mar, ISOTeam has seen a healthy pick up in volume on the back of a 78.8% appreciation in its share price. All the indicators are pointing higher with golden crosses. ADX closed at 52.2 amid positively placed DIs, indicative of a strong trend. OBV is also at a record high. At $0.059, ISOTeam is not overbought yet with RSI closing at 66.0.

Chart 1: Broke out from its 4-year downtrend line with volume expansion

Source: InvestingNote 21 Jun 2024

b) Strong and improving order book

Based on Chart 2 below, ISOTeam’s order book has gradually improved since 2HFY21. As at 31 Dec 2023, ISOTeam has an order book of around $182.4m. This has increased further to $184.0m as at 17 Apr 2024 as they clinched $24.0m of new contracts.

Post Covid, ISOTeam has been able to garner higher win rates on their submitted tenders due to i) Less competition as some of the competitors have closed down due to Covid; b) ISOTeam’s strong track record of contract execution. Management is hopeful that they can hit S$200-250m of order books by end CY2024. If ISOTeam can achieve an order book of S$200m, it will be at least a 10-year high in terms of order books.

Chart 2: Strong and improving order book

Source: Company 31 Dec 2023

c) Improving margins with likely better results going forward

Based on their 9 Oct 2023 announcement, ISOTeam has completely finished their legacy contracts clinched with lower margins. This is corroborated by the improvement in gross profit margins (GPM) which we can see in 1HFY24. Based on Table 1 below, 1HFY24 gross profit is S$8.3m is near to its entire FY23 gross profit of 10.0m. In terms of GPM, 1HFY24 GPM is 13.3% as compared to 9.3% in 1HFY23. Given that new contracts are secured with better margins (due partly to less competition and better economies of scale), there is scope for GPM to rise in 2HFY24F and again in FY25F.

Table 1: Gross profit should close the year at a five year high

Source: Company 31 Dec 2023

d) Resumption of dividends in the foreseeable future?

On 9 Oct 2023, ISOTeam announced that barring unforeseen circumstances, they plan to raise their annual dividend payout to at least 25% of net profit after tax for FY2024 and at least 30% for FY2025. Net profit after tax excludes non-recurring, one-off and exceptional items and subject to the ISOTeam’s cash and retained earnings, actual and projected financial position, capital expenditure requirements, future expansion, investment plans and other relevant factors.

This announcement, together with the announcement of capital reduction on 27 May 2024, sets the stage for a possible resumption of dividends, following a four-year hiatus due to the Covid-19 situation. Before the onset of the pandemic, ISOTeam had paid a tax-exempt (one-tier) dividend of between 0.18 Singapore cents per share and 0.75 Singapore cents per share in respect of its fiscal years from 2016 to 2019.

e) Inaugural Investor Day to be held on 3 Jul 2024

ISOTeam will host its Inaugural Investor Day on 3 Jul 2024 to share more details on their strategic developments. It will be interesting to hear what the management will be sharing as this is their first time doing an Investor Day.

f) Scope for analyst to raise target price

Based on RHB report HERE, RHB ascribed a target price of $0.048 for ISOTeam based on 9xFY24F PE. It is likely that RHB may raise target price as they roll forward to FY25F valuations.

 

Important noteworthy risks

Besides the usual business execution risks (such as cost overruns arising from rising labour costs and raw material costs), the below is just an abridged list of risks. It is not an exhaustive list of risks.

a) Lack of analyst coverage

At the moment, only RHB and SAC have rated reports on ISOTeam. Although the recent pickup in volume of ISOTeam’s shares traded in the market is encouraging, suffice to say that the investment community may not be familiar in ISOTeam, or may not be convinced that ISOTeam is on a firm turnaround.

b) Chart reading is subjective

It is important to note that chart reading is subjective. This is especially so for small caps as it doesn’t take much to move the share price.

c) Business is lumpy in nature

ISOTeam is mainly on contracts basis which is lumpy in nature. Typically, investors prefer companies with a good portion of their business on recurring basis, so as to provide some form of earnings stability. Having said that, given the various government initiatives (click HERE to view ISOTeam’s 1HFY24 presentation slides where they mentioned about the industry outlook), suffice to say that there is likely to be a good amount of contracts out for bidding in the next couple of years.

d) Reduction in dependency ratio ceiling for foreign workers

This affects the entire industry as Singapore reduces the dependency ratio ceiling for foreign workers from 1 local worker: 7 foreign workers to 1 local worker: 5 foreign workers. In other words, this means companies need to employ more local workers, thereby (likely) driving up costs. ISOTeam aims to combat this by raising productivity through the use of drones for its façade inspection, and at a later stage deploying drones for painting.

e) Safety

Any safety incidents may result in stop work orders; legal liabilities etc. and this would have an adverse impact to ISOTeam’s reputation.

 

Conclusion

ISOTeam seems to be at a stage of a firm recovery as it continues to clinch orders with higher margins and build on its already robust order books. It will be interesting to hear what the management has to share on its Investor Day on 3 Jul.

Notwithstanding the above, readers have to be aware ISOTeam’s business is “lumpy” in nature as it has to continue to win contracts to generate revenue and profits. GIven the various government initiatives (click HERE to view ISOTeam’s 1HFY24 presentation slides where they mentioned about the industry outlook), suffice to say that there is likely to be a good amount of contracts out for bidding in the next couple of years. Furthermore, cost overrun on project is another aspect to consider.

On balance, ISOTeam seems to be at a stage of a firm recovery.

P.S: I am vested. Readers are encouraged to refer to ISOTeam’s analyst reports HERE for more information.

 

Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider sending an email to my email address

ernestlim15@gmail.com

Readers can refer to my LinkedIn HERE to see my activities and which companies I have met on a 1-1 basis.

 

Disclaimer

Please refer to the disclaimer HERE