ISOTeam (ISO SP) - UOB Kay Hian 2017-01-12: Earnings-accretive Deal At A Good Price

ISOTEAM LTD. 5WF.SI

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.

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.

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.

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.

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.

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.

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

Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2017-01-12

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.60 Up 0.530