ISOTeam - RHB Invest 2019-05-15: Time For a Relook On Strong 3Q; Raise To BUY


ISOTeam - Time For a Relook On Strong 3Q; Raise To BUY

  • Upgrade to BUY with a higher DCF-backed Target Price of SGD0.29 from SGD0.23, 32% upside, 2% FY20F (Jun) yield.
  • ISOTEAM LTD. (SGX:5WF)'s 3Q19 revenue more than doubled to SGD30.4m on the back of improved performance across all business segments. PATMI was up 251.5% y-o-y to SGD1.7m from SGD0.5m.
  • We expect to see continuous improvement into FY20F. As such, we are lifting our PATMI forecast to SGD5.8m for FY19 from the initial SGD3.2m; and 8- 10% growth for FY20F-21F.

Time to relook.

  • In the last quarter’s results review (see report: ISOTeam Ltd - RHB Invest 2019-02-18: Margin Pressures Persist; A Challenging Macro), we wrote that there could be upside potential from improved margins from new contracts as well as successful cost control initiatives. We await further evidence. Indeed, the group revised its tendering strategy and continuously pursuing new business leads has borne fruit.
  • We are increasing our FY19F-22F PATMI by 79%, 39%, 21% and 8% respectively.

12-15% gross margin the “new norm”.

  • ISOTEAM had in the past achieved gross margins of above 20%. However, due to the competitive landscape, it is inevitable that the group has to reduce its prices in order to beat its competitors and win more projects.
  • We like management’s implementation of strategies to achieve the strong set of results. Latest 3Q19 and 9M19 gross profit margins were 15.7% and 14.4%.
  • Going forward, we expect gross profit margin to remain stable and lean towards the high end of 12-15%.

Orderbook holding up strong.

  • As at 30 Apr 19, ISOTEAM's orderbook remains strong at SGD128.8m (2Q19: SGD132.8m). We estimated the orderbook consists of a significant portion of the projects from the public sector and these orders would continue to drive group revenue in the next few quarters.

Upgrade to BUY

  • Upgrade to BUY with higher DCF-backed Target Price of SGD0.29 (WACC: 5%, TG: 0%).
  • See ISOTeam's share price history. We think that this is the time to relook at this counter as we see improvement in ISOTEAM’s financial results and are optimistic that the improved performance would continue due to its various initiatives.
  • Key downside risks are reduced order intake, lower margins and a negative outlook of the building maintenance & estate upgrading industry in Singapore.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2019-05-15
SGX Stock Analyst Report BUY UPGRADE NEUTRAL 0.29 UP 0.230