Excerpts from UOB Kay Hian report

Analysts: Lucas Teng & John Cheong

Sector Turnaround And Record-high Orderbook Indicate Robust Growth Prospects
Prospects have turned positive, as evidenced by more project wins and an orderbook high, setting ISOTeam off on a fresh growth chapter. Its renewed prospects include:

ISOTeam
Share price: 
24.5 c
Target: 
30 c
a) upcycle of public upgrading projects ahead of possible elections,

b) earnings recovery with orderbook at a new high, and

c) potential asset sale boost along with industry tailwinds. Maintain BUY with a lower PE-based target price of S$0.30.


WHAT’S NEW
Turning positive. According to the Singapore Commercial Credit Bureau, the construction sector saw an improvement in the proportion of slow payments in 2Q19, which dipped 0.8ppt qoq. Contracts awarded in the public residential space also picked up in April, rising 5.3% yoy, according to the Building & Construction Authority (BCA).

ESSENTIALS
Rejuvenation cycle of government projects; proxy to infrastructure spending with steady pipeline of projects. Upgrading government projects have been given a new lease of life, especially with the announcement of enhancements to the Home Improvement Programme (HIP) during last year’s National Day Rally.

AnthonyKoh8.15CEO Anthony Koh. NextInsight file photoISOTeam has a strong track record in public sector upgrading programmes and has secured projects such as the Neighbourhood Renewal Programme (NRP), Hawker Centre Upgrading Programme (HUP) and HIP. This bodes well for ISOTeam as repair and redecoration (R&R) projects have recovered from a slump in 2018 with more tenders being offered by respective town councils ahead of a possible election.

The government’s new HIP initiative extends the HDB upgrading works to flats built between 1987 and 1997, adding 230,000 units to the pipeline, while the proposed HIP II programme allows older flats (aged 60-70 years) a second round of upgrading. ISOTeam had won two HIP projects recently in Jan 19.

• Earnings recovery and record-high orderbook on private-sector wins. ISOTeam’s revenue has surged across all its business segments as project contributions increased significantly from a low in 2018.

Historically, the group has also seen a boost in orders before general elections. Private-sector projects are starting to contribute more significantly as the group has won major A&A works for integrated resorts (IR), such as commercial interior design projects at Marina Bay Sands due to its extensive services and cross-selling expertise. We expect ISOTeam to continue deploying its comprehensive capabilities and building on its IR contract wins.”

-- UOB Kay Hian report

In 3QFY19, Addition and Alteration (A&A) revenue increased to S$12.2m (3QFY18: S$4.8m) while R&R revenue increased to S$5.9m (3QFY18: S$3.2m). Net margins have also improved, partly due to cost savings from its new Changi headquarters, with G&A cost/turnover ratio dropping to 11.7% in 3QFY19 (3QFY18: 20.8%).

As such, we note that an earnings recovery is in motion with increased projects and enhanced margins. ISOTeam’s orderbook currently sits at S$129m compared to the low of S$80m-90m in FY17-18.

• Multiple tailwinds including favourable industry trends along with potential asset sale boost.

a) Riding on the eco-friendly trend. The group has also added landscaping, bike sharing and odour removal as part of its offerings, tapping on the trend towards ecofriendly solutions. The group has also ventured into bike-sharing with SG Bike and it is now one of the very few remaining licensed operators in the space with exits from competitors in recent months

b) Solar projects provide sunny prospects. The ramp-up in solar projects has also raised ISOTeam’s prospects given its prior experience in such a niche space and strategic partnership with Sunseap. The HDB is on its fourth SolarNova tender, a project designed to increase solar capacity and enhance energy sustainability, with 5,500 HDB blocks targeted for solar panel installations by 2020, including approximately 1,200 blocks in the latest tender.

ISOTeam’s experience in solar panel installations has also extended beyond rooftops and into the sea, with the company winning an S$11.3m contract for the installation of offshore solar panels in Jan 19 along the Straits of Johor. Larger scale projects are also in the pipeline at Kranji and Tengah reservoir given the land scarce-nature of Singapore.

c) Sale of property could unlock value. ISOTeam moved to its new Changi headquarters in 2018. The consolidation in its new premises not only allows for cost savings, but the sale of its remaining properties in Kaki Bukit and Serangoon which could also help unlock value with estimated gains of S$3m, allowing for potential accretive acquisitions.


EARNINGS REVISION/RISK
Revised net profit forecasts to S$5.6m (FY19), S$6.7m (FY20) and S$8.3m (FY21). We make substantial revisions to our earnings forecasts, accounting for new project wins. Our earnings forecasts are at S$5.6m (FY19), S$6.7m (FY20) and S$8.3m (FY21) as we also factor in cost savings improvements and slight margin recovery.

VALUATION/RECOMMENDATION
Maintain BUY. Reduce PE-based target price to S$0.30. This is based on a 12.4x 1- year forward PE, in line with ISOTeam’s mean forward PE (excluding the low earnings in 2018). The group’s recurring income is also attractive with a minimum dividend payout policy of 20%.

SHARE PRICE CATALYST
• Accretive M&As.
• Contract wins.
• Margin improvement from new headquarters.


Full report here.


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