ISOTeam - RHB Invest 2018-02-14: Proposed Divestment And Joint Venture

ISOTeam - RHB Invest 2018-02-14: Proposed Divestment And Joint Venture ISOTEAM LTD. 5WF.SI

ISOTeam - Proposed Divestment And Joint Venture

  • ISOTeam has announced entering into a non-binding term sheet with Taisei Oncho Co Ltd (TOC) to establish a JV. This would be through the sale of a 34.1% stake in ISO-integrated M&E Pte Ltd for SGD3m, valuing the subsidiary at SGD8.8m.
  • Despite a weaker 1HFY18 due to lower-margin projects, we expect 2HFY18 to make up for the shortfall through higher-margin projects in 2HFY18, lower costs due to the centralisation of all of ISOTeam’s subsidiaries into the new premises in Changi, as well as one-off gains from the sale of its old office and divestment gains. 
  • Maintain BUY and Target Price of SGD0.46 (39% upside).

Weak 1HFY18 due to lower-margin projects. 

  • Despite a higher revenue growth of 9.2% y-o-y for 1HFY18 (Jun), ISOTeam’s NPAT fell 33.5% y-o-y due to lower-margin projects being realised in 1HFY18, as well as one-off costs from the new office renovations. The strong competition also resulted in lower margins for its projects tendered. 
  • The company enjoyed revenue growth in all business segments except for the coating and painting segment, due to more resources allocated for other segments. 
  • ISOTeam’s orderbook remains healthy at SGD80.7m, which is to be progressively delivered over the next two years.

The proposed divestment and JV of its M&E arm with Taisei Oncho Co Ltd (TOC) values the subsidiary at SGD8.8m. 

  • TOC is headquartered in Tokyo and listed on the JASDAQ securities exchange. It is primarily involved in design and contract work for air conditioning, plumbing and electrical installation work, maintenance and renovation services; with 25 sales offices in Japan and six offices globally. 
  • The proposed agreement would allow ISOTeam to strengthen its mechanical & electrical (M&E) and energy management capabilities and further expand its services in the region, by leveraging on TOC’s M&E expertise and overseas network.

Better 2H18F ahead, maintain BUY with unchanged DCF-backed (WACC: 12.5%, TG: 0%) Target Price of SGD0.46. 

  • Despite a weaker 1HFY18 due to lower margin projects, we expect 2HFY18 to make up for the shortfall. This would be due to higher-margin projects in 2HFY18, along with reduced costs from the centralisation of all subsidiaries into its Changi premises. 
  • ISOTeam would likely also enjoy one-off gains from the sale of the old office, plus divestment gains from the upcoming sale of its 34.1% stake in its M&E arm.
  • In addition, its orderbook remains at a healthy level of SGD80.7m, with the company still expecting to add on to its orderbook with a few larger project tender results to be announced in the next few months. As a result, we remain optimistic on ISOTeam, maintaining our BUY call with an unchanged Target Price of SGD0.46.
  • The key risk to our forecasts would be price competition, leading to lower margins.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2018-02-14
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.460 Same 0.460