ISOTeam (ISO SP) - Earnings-accretive Deal At A Good Price
- ISOTeam announced S$22.7m of new wins and its latest acquisition in a cash-and-treasury share deal with the shares priced at a 5% premium.
- We find this earnings accretive acquisition to be a positive and done at a good price as at least a S$13m orderbook and 12% pre-tax margin until Sep 19 will be guaranteed.
- We raise our FY17-18 net profit estimates by 15% and 14% respectively.
- Maintain BUY with a higher target price of S$0.60 (+13% from S$0.53) on higher-than-expected earnings.
Acquisition of Rong Shun through a cash-and-treasury share deal.
- On 5 Jan 17, ISOTeam announced the acquisition of Rong Shun Engineering & Construction in a S$6.45m deal with 57% in cash and the rest using treasury shares.
Treasury shares to be delivered in three tranches priced at 5% premium.
- The treasury shares will be delivered in three tranches at a transfer price 5% above the 30- day volume weighted average before the deadline for each tranche.
- The first (S$1.58m) will be settled before the completion date, while the second and the third tranches of S$0.6m each will be settled one and two years respectively after the completion date.
Seller guarantees at least S$3m NTA, maintenance of S$13m orderbook and 12% pre-tax margin until Sep 19.
- The seller has guaranteed that as of Sep 16, the NTA will be at least S$3.03m with all account receivables warrantied.
- It has also guaranteed to maintain an orderbook of at least S$13.1m with a 12% pre-tax margin until Sep 19.
New contract wins to replenish orderbook.
- On 10 Jan 17, ISOTeam announced S$22.7m worth of new project wins, increasing total new contract wins to S$42.8m since the start of FY17. Notably, it has won its largest solar panel installation project worth S$6.3m for 150 blocks of HDB flats from Sunseap.
- While the win comes a bit later and smaller than what we had estimated (200 blocks), it nevertheless marks a good start and more should follow for the subsequent phases as Singapore continues its drive for green and renewable energy.
Earnings-accretive deal is a positive.
- We opine the acquisition is a positive as it is earnings-accretive (being a cash-and-treasury share deal) done at an attractive price (1.9x book and 5x historical PE on S$1.7m profit as of FY16).
- Other than the seller’s profit guarantee, management also shared its confidence on the subsidiary and its ability to perform going forward, given that Rong Shun historically wins and executes S$15m-20m of projects a year with pre-tax margins in excess of 12%.
- We raise our FY17-18 net profit forecasts by 15.0% and 14.4% respectively to take into account the earnings-accretive acquisition.
- Maintain BUY and raise our DCF-derived target price to S$0.60, based on 10% WACC and 0% terminal growth.
SHARE PRICE CATALYST
- More contract wins from renewable energy or other new business segments that can propel earnings to the next level.
- Better-than-expected dividends payout.