ISOTeam - RHB Invest 2016-05-31: A Visit To Isoteam's Yangon operations

ISOTeam - RHB Invest 2016-05-31: A Visit To Isoteam's Yangon operations ISOTEAM LTD 5WF.SI 

ISOTeam - A Visit To Isoteam’s Yangon operations

  • We endured the local heatwave (about 41 degrees Celcius) and visited Isoteam’s operations in Yangon to find out more on the opportunities available in Myanmar. 
  • We came away feeling excited about its prospects due to the construction boom that is ongoing, especially in the residential property development space. We understand that it is already in negotiations to secure a few projects. 
  • In addition, we expect the company to secure more solar installation projects from Sunseap, with 70% of the first contract already fulfilled. 
  • Maintain Conviction BUY.

Need for quality paints and painters with good execution record. 

  • We understand that there is currently a lack of supply for luxury housing in Yangon due to the influx of expatriates. As local and foreign investors have been flocking to Myanmar, developers – especially in recent years – have been building more mega-residential developments that they term as “cities”. Such projects comprise residential and commercial segments. 
  • As many of these “cities” popping up around Yangon are set to be completed in the next 1-2 years, we believe that there is demand for a supplier that provides top-quality paint and painters with good execution record – and we think Isoteam fits the bill. 
  • In fact, we understand that the company is already negotiating for a few potential projects that are likely be secured in the near term.

Nippon Paint fighting for market share. 

  • Isoteam’s JV partner, Nippon Paint, may also be aggressively fighting for market share and has started with the expansion of its sales force as well as building a new plant to reduce its cost of production. 
  • Isoteam, Nippon Paint’s official paint applicator in Myanmar, would also benefit from this. 
  • Currently, paints manufactured by UPG Paints dominates over 80% of the market share and Nippon Paint holds less than a 3% share. Despite import taxes that would lift Nippon Paint’s costs to premium levels, we understand that Nippon Paint is willing to lower product prices in order to grab more market share – which would be beneficial for Isoteam.

More contract wins, maintain BUY. 

  • Going forward, we expect Isoteam to secure more projects, both on the addition and alteration (A&A) and repairs and redecoration (R&R) front. Also, the results of a few tender bids will be known in the near term. 
  • We also expect it to win more solar installation projects from Sunseap – in fact, Isoteam has already fulfilled 70% of its first contract with the former. Myanmar may offer vast opportunities for Isoteam and it will likely secure a few projects ranging from USD0.5m to USD2m in the near term. 
  • All in all, we are excited about the company’s prospects and remain confident over its steady growth plans. 
  • Maintain Conviction BUY with a DCF-backed TP of SGD0.41 implying 10x FY16F P/E. 
  • Key downside risks for the stock include economic slowdown and changes in government regulations.

Jarick Seet RHB Invest | 2016-05-31
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.41 Same 0.41