Excerpts from analyst's report
UOB Kay Hian analyst: Edison Chen
|Contract Wins Galore. BUY for 39.4% Upside.
The largest contractor of maintenance and addition works for public housing, ISOTeam has been delivering impressive profit CAGR growth of 40% since its IPO. We believe:
a) its traditional portfolio’s strong order win momentum would continue,
b) its first overseas contract win is imminent, and
c) renewables/green energy contract wins will keep flowing in.
We expect exciting profit growth of >17% and ROE of >18% for FY16-18, as well as net cash of S$36m (33.3% of market cap), to fuel a potential dividend increase and/or more share buyback.
Re-initiate coverage with BUY and DCF-derived target price of S$0.53.
♦ Re-initiate coverage with BUY with DCF-derived target price of S$0.53 with a conservative WACC of 10.0% and a terminal growth rate of 0%, representing 39.4% upside potential.
Given our forecasts of net profit growth of >17% and ROE of >18% for FY16-18, the target price implies a reasonable FY17F PE of 13.3x and P/B of 2.5x.
♦ Impressive revenue and profit growth as the largest contractor of maintenance work for HDB. ISOTeam has entrenched itself as the largest contractor (~20-30% market share) engaged in maintenance and addition works for public housing (HDB/town councils) with 18 years of experience.
It has even won projects despite not being the lowest bidder. Since its 2013 listing, it has reported impressive revenue and profit CAGR growth of 32.1% and 40.1% respectively. We believe this growth will continue given its strong order win momentum.
♦ Strong order win momentum from traditional portfolio to continue. Since the start of the year, ISOTeam has announced 19 contract wins with a total value of around S$44.8m. We estimate its current orderbook to be around S$110m with more contract wins to be announced in 2H16, providing earnings visibility for FY17 and beyond.
♦ Status as exclusive paint applicator of Nippon and SKK brings key benefits. One of ISOTeam’s biggest strengths is being the exclusive paint applicator for Nippon Paint Singapore and SKK. This brings about several key advantages, including: a) improved branding and recognition, b) cheaper paint costs, which allows ISOTeam to bid more competitively for projects, and c) referral businesses from the paint companies.
♦ Renewable/green energy contract wins to keep flowing in. We believe the recent S$1.8m contract for 33 blocks is more likely an initial “test” from Sunseap to select qualified contractors to fulfil the full quota for the SolarNova tender involving 831 blocks. We believe ISOTeam would perform better than its competitors with its expertise and should win at least 200 blocks worth of work soon.
♦ Net cash of S$36m will likely fuel dividend increase and more share buyback. With a net cash position of S$36m (33.3% of market cap) expected for FY17, we opine that ISOTeam could increase its dividend payout ratio for dividends to S$0.012 in FY17, or 3.2% yield. The possibility of more share buyback is likely as well.
|♦ First overseas contract win imminent|
|"With Nippon Paint Singapore’s help, we expect ISOTeam to announce its first Myanmar contract soon and for its overseas growth to grow rapidly in the range of 40-50% as they develop a foothold overseas. If successful, they could explore similar opportunities in other countries."
-- Edison Chen (photo)
VALUATION: Re-initiate Coverage With BUY And Target Price Of S$0.53
♦ DCF-derived target price of S$0.53 with 10% WACC and 0% terminal growth. We reinitiate coverage on ISOTeam with a BUY and a DCF-based target price of S$0.53, representing 39.4% upside potential.
Even based on a conservative WACC of 10.0% and a terminal growth rate of 0%, we arrive at an overall intrinsic value of S$0.53 for the stock after including the net cash balance.
The target price implies a reasonable FY17F PE of 13.3x and P/B of 2.5x given our forecasts of strong net profit growth of >17% and ROE of >18% for FY16-18.
Full report here.