ISOTeam – Defensive & recurring business

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ISOTeam – Defensive & recurring business

ISOTeam – Defensive & recurring business 150 150 Ernest Lim's Investing Blog

ISOTeam – Defensive & recurring business

Ernest Lim

It had been a while since I last posted a company writeup on my blog (the previous one was Nam Cheong in late Nov 2013). I had been doing some regular informal email writeups to my clients but due to time constraints, I was not able to do a formal writeup and post on my blog. Finally, I managed to set aside some time to do a writeup on this company below.

Description of ISOTeam
ISOTeam has a 15 year track record in Repair & Redecoration works (“R&R”) and Addition & Alteration works (“A&A). It has undertaken over 200 R&R and A&A projects involving more than 1,500 buildings. See Figure 1 on the description of its business segments below.
Figure 1: ISOTeam business model

Source: Company Annual Report FY13 (financial year ends in June)

What’s so interesting on ISOTeam?
 
1.     Recurring business (i.e. R&R) comprises approx 50% of revenue and gross profit
Based on Figure 2 below, ISOTeam’s R&R segment comprises of approx 50% of FY12 & FY13 revenue and gross profit. This is comforting to investors as this segment is recurring in nature. It is also supported by government regulations. Unless the Commissioner of Buildings approves otherwise, the exterior walls of buildings are mandated to be repainted at intervals of not more than five years. This creates recurring demand for ISOTeam’s R&R business segment.
Figure 2: ISOTeam’s revenue and gross profit breakdowns

Source: Company FY13 Presentation Slides

Source: Company FY13 Presentation Slides


Source: Company FY13 Presentation Slides

 

2.     Strong order books amid regular contract wins
During their announcement of their FY13 results, ISOTeam mentioned that its order books as of 14 Aug 2013 stood at S$81.0m to be recognized over the next 24 months. This order book of S$81.0m took into account of their contract wins of S$10.9m which was announced on 14 Aug 2013. It is noteworthy that ISOTeam’s FY13 revenue was around S$48m. Hence this order book of S$81.0m to be recognized over the next 24 months provides some earnings visibility in the next two years. In addition, ISOTeam is the lowest bidder for several projects amounting to S$27.0m.

Subsequent to their FY13 results announcement, ISOTeam announced on 26 Oct 2013 that it has won S$19.0m new contracts. Since their IPO on 12 July 2013, they have announced ten contract wins amounting to S$29.9m.

 

3.     More growth opportunities ahead

Firstly, there is scope for growth in new markets, new customer networks, new related businesses etc as ISOTeam may embark on potential acquisitions, joint venture and / or strategic alliances. Secondly,
ISOTeam plans to diversify into the private sector by establishing a private home renovation arm to provide retrofitting services to customers living in landed properties to cater to the various maintenance and property enhancement needs of these homeowners. For the above plans, based on its prospectus, ISOTeam has set aside S$2.5m of its IPO proceeds and has credit facilities of up to S$17.7m for potential business opportunities.

Thirdly, ISOTeam’s industry continues to be buoyed by government initiatives and regulations. For example, the National Environment Agency planned to construct ten new hawker centers by 2017. The Land Transport Authority aimed to construct 200 km of new sheltered linkways between 2014-2018. Also, land has been set aside to build 700,000 new homes by 2030 to cope with a target 6.9m population
by then. Hence, ISOTeam’s industry continues to be underpinned by such government initiatives and regulations.

Fourthly, ISOTeam continues to gain entry in untapped sectors. According to its Annual Report 2013, ISOTeam became SKK’s exclusive applicator for JTC industrial projects, army camps and HDB industrial projects since August 2013. This is likely to open out a new chapter of growth for ISOTeam.


4.     Dividend stock in the making?

ISOTeam has distributed a $0.01 dividend per share for its FY13 equivalent to a dividend payout ratio of approximately 20%. Based on a UOB research report, they estimate that ISOTeam’s FY14F to be around S$6.3m. Assuming that ISOTeam’s dividend payout ratio remains the same, investors are likely to get $0.01 dividend per share which works out to be around 2.6% dividend yield. There may be scope of increasing the dividend payout ratio in the years ahead.


Risks

1.     Moratorium ends in January 2014
According to ISOTeam’s prospectus, the moratorium for ISOTeam’s substantial shareholders, namely, ADD Investment, David Ng, Anthony Koh and Danny Foo ends in January. This means that they are free to dispose a portion of their shares. Their total direct and indirect stake amounts to 79.4m shares or 67.6% of ISOTeam’s total outstanding shares. It is noteworthy that ISOTeam share price is up a whopping 77% since its IPO at $0.220 in July 2013. Potential investors should take note of this aspect especially in view of its illiquidity.
2.     Limited analyst coverage

Only UOB Kayhian covers ISOTeam with a target price of S$0.550. It is reasonable to say that most investors are still unfamiliar with ISOTeam. In addition, its small market capitalization of S$44m precludes some funds from taking a position in them.

3.     Illiquid and small market cap of S$44m
With reference to Figure 3 below, ISOTeam’s annual report 2013, the top twenty shareholders have about 89.6% of ISOTeam’s outstanding shares. Thus, there is little free float outside which results in its illiquidity. Average 30D and 100D volume amounts to 588,000 shares and 842,000 shares respectively. This is not a liquid company where investors can enter or exit quickly.

 

Figure 3: ISOTeam’s top 20 shareholders as at 23 Sep 2013

 

Source: Company Annual Report FY13
4.     Presence mainly in Spore – concentration risk
As ISOTeam’s business exposure is solely in Singapore with the bulk of its revenue coming from the government, any adverse changes in the government’s budget or policies on building maintenance and estate upgrading may affect ISOTeam.
ISOTeam chart analysis
Stock has consolidated for 9 trading days before it gapped
up on 16 Jan 2014. It closed at $0.390 on last Friday. Supports and
resistances are as follows
Supports: $0.365 – 0.375 / 0.345 – 0.355

Resistances: $0.395 – 0.400 / 0.410 – 0.415 / 0.440 – 0.450

Based on Chart 1 below, chart seems to be on an uptrend and looks set to break $0.395- 0.400.
Key resistances are around 0.410 – 0.415 / 0.440 – 0.450.

 

Chart 1: Consolidated for 9 trading days before gapping up on 16 Jan 2014

 

 

 

 

 

 

 

 

 

 

 

Source: CIMB chart as of 17 Jan 2014

Conclusion – 1HFY14F results, potential contract wins or M&A may be re-rating catalysts
ISOTeam generated an adjusted FY13 net profit (less off the disposal gains of S$4.2m and add back S$1.1m in non recurring IPO expenses) of around S$3.9m. UOB estimates its FY14F net profit to be around S$6.3m. If this materializes, it would be a 62% increase in core profits. At S$6.3m, ISOTeam would be trading at around 7.3x FY14F PE. Any potential M&As or higher than expected contract wins may further boost ISOTeam’s profitability.

 

Lastly, this is just an introduction to ISOTeam…

 

For readers who are interested, they should take a look at the company website http://isoteam.com.sg/ In addition, as I am not able to reproduce some figures on my blog, readers who are interested can drop me an email at crclk@yahoo.com.sg so that I can send them my writeup.

 

This is an abridged version which I had sent to my clients a couple of days ago.

 

Disclaimer

The information contained herein is the writer’s personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

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