ISOTEAM (ISO SP) - UOB Kay Hian 2017-05-15: Missed Expectations

ISOTEAM (ISO SP) - UOB Kay Hian 2017-05-15: Missed Expectations ISOTEAM LTD. 5WF.SI

ISOTEAM (ISO SP) - Missed Expectations

  • ISOTeam missed expectations with its latest 3QFY17 results as intensified competition saw the R&R segment revenue drop, offsetting A&A and C&P gains.
  • However, there are early signs of upturn in the property market, new contribution drivers (renewables and Rong Shun) as well as new growth area (pest removal).
  • Nonetheless, we opt to cut 2017-18 earnings by 26.7% and 19.2% respectively.
  • Maintain BUY with new DCF target price of S$0.54, implying 12.6x FY18F PE.



WHAT’S NEW


3QFY17 missed expectations. 

  • 3QFY17 results came in below our expectations as intensified competition caused contributions from the R&R segment to dip, leading to a 17.3% drop in total revenue. 
  • Nonetheless, PATMI still increased 18.9% yoy thanks to a tax credit compared to an S$0.8m tax expense last year.

Revenue gains from A&A and C&P offset by R&R dip caused by intensified competition. 

  • While revenue contributions from A&A and C&P segments improved 16.8% and 131.7% respectively, R&R revenue dropped 45.5% as the property sector remained sluggish with excess contractor capacity. 
  • Contractors which previously focused on private projects are now bidding for public projects, adding to the competition.


STOCK IMPACT


R&R could pick up amidst early signs of upturn in the property market. 

  • R&R’s revenue dip is no longer a timing issue as we previously expected. 
  • On the bright side, there are signs of stabilisation amidst early signals of a possibly upturn in the property market. As such, management is expecting new order wins to pick up with benefits starting next year.

One-off bad debt write-offs could hit S$1.7m for the year. 

  • Bad debts for the year could rise to as much as S$1.7m as management shared that two of its private clients had filed for bankruptcy.

Renewable energy and Rong Shun to act as new contribution drivers. 

  • We expect renewable energy (SolarNova) and the new subsidiary, Rong Shun, to contribute to bottom-line in 2HFY17. 
  • Backed by the seller’s profit guarantee, we expect Rong Shun to deliver S$0.8m in net profit in 2HFY17.

Pest removal could be a new growth area. 

  • A new non-toxic pesticide, jointly developed with E-Organic Solutions, has ended its trial period with the Tampines Town Council. 
  • Other than Tampines, six other town councils have also expressed interest and we note how this could become a new growth area for ISOTeam.


EARNINGS REVISION/RISK


Decrease FY17-18 earnings until greater certainty. 

  • Nonetheless, we opt to take a more conservative stance until there is greater certainty and cut FY17-18 earnings by 26.7% and 19.2% respectively.


VALUATION/RECOMMENDATION


Maintain BUY with new S$0.54 DCF-based target price. 

  • With lowered earnings, we derive a new DCF based target price of S$0.54, implying 12.6x FY18F PE.


SHARE PRICE CATALYST

  • More contract wins from renewable energy or other new business segment that will propel earnings to the next level.
  • Better-than-expected dividends payout.




Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-15
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.54 Down 0.600



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