Excerpts from analyst's report

UOB Kay Hian analyst: Loke Chunying

ISO brief8.15ISOTeam management at a results briefing. NextInsight file photo.


VALUATION
 Maintain BUY with a slightly higher target price of S$0.73 as we roll forward our forecast to 9.6x FY17F PE and adjust for the enlarged share base. 


WHAT’S NEW
 Acquiring TMG for S$4m. TMG Projects (TMG) is principally engaged in the business of general engineering works and contractor works, providing architectural and interior construction solutions mainly to high-value commercial sectors. The purchase consideration will be satisfied by 60% in cash (S$2.4m) and the remainder through the transfer of treasury shares at a transfer price of S$0.63/share.

Assuming the proposed acquisition had been effected at the start of FY15, it would have contributed S$0.12m to ISO’s FY15 net profit. 


INVESTMENT HIGHLIGHTS
Stronger foothold in the private sector. The acquisition will enable ISO to further enhance its presence in the private sector across industries such as shopping malls, schools, hospitals and high-end hotels through TMG’s experienced management team led by Mr Lim Chiew Hoe, who has more than 30 years of experience in the interior design industry. To recall, in 2014, ISO acquired Accom, an established repairs and redecoration specialist in the private sector, so as to expand into the local private sector where it has yet to tap into.

lokechunyingUOB5.15 Spreading its wings beyond Singapore. We understand that ISO’s preparation to expand overseas is also progressing well. To recall, ISO was in talks with its strategic supplier and shareholder, Nippon Paint (Singapore), to expand its footprint in regional markets such as Myanmar. By tapping Nippon’s Paint existing customer base in Myanmar, the risks of overseas expansion for ISO will likely be drastically reduced. We estimate Nippon Paint to have about a 2% market share in Myanmar. -- Loke Chunying (photo)

Near-term price support from share buybacks. Of note, 40% (S$1.6m) of the consideration for the acquisition of TMG will be satisfied through transfer of treasury shares at S$0.63/share.

If ISO does not have the necessary shares before the date of completion, it will settle the remaining purchase in cash.

As such, we believe stock prices will likely be supported in the near term by ISO’s share buybacks to fulfil the acquisition. ISO has recently repurchased 1.2m shares at S$0.625-0.63/share from the market.


 We update our estimates to account for the acquisition but keep our profit forecasts relatively unchanged.

Full report here.

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