ISOTEAM LTD
5WF.SI
ISOTeam (ISO SP) - Mid Caps: Contract Wins Galore; BUY For 39.4% Upside
- The largest contractor of maintenance and addition works for public housing, ISOTeam has been delivering an impressive profit CAGR of 40% since its IPO.
- We believe:
- its traditional portfolio’s order win momentum would continue,
- its first overseas contract win, and
- renewables energy contract wins will keep flowing in.
- We expect exciting profit growth of > 17% and ROE of > 18% for FY16-18, as well as net cash of S$36m (33.3% of market cap), to fuel a potential dividend increase or more share buyback.
- Re-initiate coverage with BUY and target price of S$0.53.
WHAT’S NEW
- We re-initiated coverage on ISOTeam.
INVESTMENT HIGHLIGHTS
Impressive revenue and profit growth as the largest contractor of maintenance work for HDB.
- ISOTeam has entrenched itself as the largest contractor (~20-30% market share) engaged in maintenance and addition works for public housing (HDB/town councils) with 18 years of experience. It has even won projects despite not being the lowest bidder.
- Since its 2013 listing, it has reported impressive revenue and profit CAGR growth of 32.1% and 40.1% respectively. We believe this growth will continue given its strong order win momentum.
Strong order win momentum of traditional portfolio to continue.
- Since the start of the year, ISOTeam has announced 19 contract wins with a total value of around S$44.8m.
- We estimate its current orderbook to be around S$110m with more contract wins to be announced in 2H16, providing earnings visibility for FY17 and beyond.
Status as exclusive paint applicator of Nippon and SKK brings key benefits.
- One of ISOTeam’s biggest strengths is being the exclusive paint applicator for Nippon Paint Singapore and SKK. This brings about several key advantages, including:
- improved branding and recognition,
- cheaper paint costs, which allows ISOTeam to bid more competitively for projects, and
- referral businesses from the paint companies.
First overseas contract win imminent.
- With Nippon Paint Singapore’s help, we expect ISOTeam to announce its first Myanmar contract soon and for its overseas revenue to grow rapidly in the range of 40-50% as they develop a foothold overseas. If successful, they could explore similar opportunities in other countries.
Renewable/green energy contract wins to keep flowing in.
- We believe the recent S$1.8m contract for 33 blocks is more likely an initial “test” from Sunseap to select qualified contractors to fulfil the full quota for the SolarNova tender involving 831 blocks.
- We believe ISOTeam would perform better than its competitors with its expertise and should win at least 200 blocks worth of work soon.
Net cash of S$36m will likely fuel dividend increase and more share buyback.
- With a net cash position of S$36m (33.3% of market cap) expected for FY17, we opine that ISOTeam could increase its dividend payout ratio for dividends to S$0.012 in FY17, implying a 3.2% yield. The possibility of more share buybacks is likely as well.
VALUATION/RECOMMENDATION
- Re-initiate coverage with BUY and DCF-derived target price of S$0.53 with a conservative WACC of 10.0% and terminal growth rate of 0%, representing 39.4% upside potential.
- Given our forecasts of net profit growth of > 17% and ROE of > 18% for FY16-18, our target price implies a reasonable FY17F PE of 13.3x and P/B of 2.5x.
Edison Chen
UOB Kay Hian
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http://research.uobkayhian.com/
2016-07-27
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