ISOTeam - RHB Invest 2018-05-17: Sector Weakness Persists

ISOTeam - RHB Invest 2018-05-17: Sector Weakness Persists Market Cap ISOTEAM LTD. SGX: 5WF

ISOTeam - Sector Weakness Persists Market Cap

  • ISOTeam reported a weak 3QFY18 due to weak performances across the board. This was caused by fewer projects executed and lower margins across all its segments due to the stiffer competition in the sector. As a result, we lower our FY18F-19F PATMI by 13% each to reflect the group’s decreased margins.
  • However, we understand that a few large projects are to be recognised in 4QFY18, which should result in a stronger performance during this period.
  • Maintain BUY, with a new DCF-backed SGD0.42 Target Price from SGD0.46, 20% upside.

Weak 3QFY18 (Jun) due to lower-margin projects.

  • ISOTeam, along with its peers, are being impacted by industry weakness. This has resulted in fewer projects being executed across its three main segments, resulting in revenue declining 10.6% y-o-y.
  • The group’s 3QFY18 NPAT has slumped 52% y-o-y, partially due to lower-margin projects being realised during this period, and higher marketing and distribution expenses.
  • The strong competition in the industry also resulted in lower margins for its tendered projects. However, ISOTeam’s orderbook remains healthy at SGD84.4m, which is to be progressively delivered over the next two years.

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

  • Taisei Oncho is headquartered in Tokyo and listed on the JASDAQ. It is primarily involved in design and contract works for air conditioning, plumbing and electrical installation, as well as maintenance and renovation services. TOC has 25 sales offices in Japan and six offices globally.
  • The proposed agreement would allow ISOTeam to strengthen its M&E and energy management capabilities, as well as further expand its services in the region – this would be done by leveraging on TOC’s M&E expertise and overseas network.

Maintain BUY, with a new DCF-backed Target Price of SGD0.42

  • Maintain BUY, with a new DCF-backed Target Price of SGD0.42 from SGD0.46, 20% upside (WACC: 12.5%, TG: 0%), as we lower our FY18F-19F PATMI by 13% respectively to reflect ISOTeam’s decreased margins.
  • Despite a weaker 3QFY18 due to lower-margin projects, we expect 4QFY18 to make up for the shortfall. This would be due to higher-margin larger projects that are to be recognised in 4Q1FY8, along with reduced costs from the centralisation of all subsidiaries into its Changi premises.
  • ISOTeam is likely to enjoy one-off gains too from the sale of its old office, as well as divestment gains from the upcoming sale of its 34.1% stake in its M&E arm. In addition, the group’s orderbook remains at a healthy SGD84.4m level, with ISOTeam still expecting to add on to its orderbook with a few larger project tender results that are to be announced over the next few months.
  • We also think it is an attractive acquisition target by firms that are keen to add recurring revenue in the construction space into their P&L statements.
  • The key risk to our forecasts would be price competition, which would lead to lower margins.

Jarick Seet RHB Invest | 2018-05-17
SGX Stock Analyst Report BUY Maintain BUY 0.420 Down 0.460