ISOTEAM LTD.
5WF.SI
ISOTeam (ISO SP) - 1HFY17 ~ Looking To A Better 2HFY17
- ISOTeam’s 1HFY17 results came in slightly below expectations due to the lumpy nature of its R&R business and one-off expenses.
- However, revenue at its other segments jumped. While gross margin performed, net margin was hit by higher SG&A expense.
- Nonetheless, ISOTeam continues to win new orders, boosting its orderbook to S$107.5m.
- New subsidiary’s contributions and more projects executed will help ISOTeam’s 2HFY17 performance.
- Maintain BUY. Target price: S$0.60.
RESULTS
1HFY17 results came in slightly below expectations.
- ISOTeam’s 1HFY17 net profit declined 6.6% yoy on the back of flat revenue growth. The disappointment was largely due to the timing of revenue realization as well as one-off cost.
Mixed results from traditional A&A and R&R businesses.
- Due to the nature of its lumpy revenue, R&R revenue dived 55.5% yoy to S$10.7m due to the timing of revenue realisation. This was partially offset by a jump in A&A revenue (+77.6% yoy) to S$17.3m.
New segment continued to perform.
- The group’s new C&P segment, which caters primarily to private-sector projects, saw revenue continuing to climb (+67.8% yoy) to S$8.2m. Revenue for its Others segment, derived largely from interior design, waterproofing and landscaping works, also jumped 41.3% yoy to S$6.1m.
Bottom line dragged by higher SG&A expense.
- While group gross margin saw an uptick of 3.8ppt to 28.2% due to better sales mix, the jump in SG&A expense led to a lower net margin of 9.5%. The group expanded into Myanmar and Malaysia, which resulted in higher staff cost and overheads (S$1.4m) as well as one-off doubtful debt provision of S$0.6m.
STOCK IMPACT
Recent order wins boosted orderbook.
- ISOTeam secured its first HDB Home Improvement Programme project worth S$17.5m on 26 Jan 17. With that, its orderbook as at 26 Jan 17 stood at S$107.1m. In view of Singapore’s increased infrastructure spending, we expect the company to win more contracts soon.
Rong Shun to contribute from 2HFY17.
- We expect the new subsidiary, Rong Shun, to contribute to bottom line from 2HFY17. Backed by the seller’s profit guarantee, we expect Rong Shun to deliver S$0.8m net profit in 2HFY17.
EARNINGS REVISION/RISK
Forecasts unchanged as fundamentals intact.
- Our checks with management show that the miss in 1HFY17 earnings estimate is a temporary issue due to timing as more projects are scheduled to be executed in 2HFY17. Therefore, we are confident that ISOTeam will be able to deliver in 2HFY17 on the back of its strong orderbook and on a new profit stream from Rong Shun.
VALUATION/RECOMMENDATION
- Maintain BUY and DCF-derived target price of S$0.60, based on 10% WACC and 0% terminal growth.
SHARE PRICE CATALYST
- More contract wins from the renewable energy or other new business segments that will propel earnings to the next level.
- Better-than-expected dividend payout.
Edison Chen
UOB Kay Hian
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http://research.uobkayhian.com/
2017-02-14
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