ISOTEAM: RHB & UOBKH maintain 'Buy' on M&A & new contracts

Excerpts from analysts' reports

RHB analyst: Jarick Seet

ISOTeam is a leading player in the building maintenance and estate upgrading industry in Singapore. (Photo: Company) ISOTeam is acquiring Rong Shun Engineering for SGD6.45m. We deem this exercise positive, as it comes with a PBT guarantee of not <12% of an existing orderbook that cannot go below SGD13.1m. This works out to a SGD1.6m PBT guarantee, implying just 4x P/E. Hence, we lift our FY17F NPAT by 12.6%, which results in our DCF-backed TP being raised to SGD0.59 (from SGD0.54, 48% upside). This implies 13.5x FY17F P/E. With SGD22.7m in new contracts boosting ISOTeam’s orderbook to SGD101m, we remain positive on this counter and maintain our BUY call.

• Complement the renewable energy business
  ISOTeam said the proposed acquisition of Rong Shun Engineering & Construction allows it to have tighter control over costs and work progress. This is given the latter’s in-house mechanical & electrical (M&E) capabilities.
  
  Additionally, the company said it would be able to also to generate cost savings from additional efficiencies, especially for its renewable energy business that involves the installation of solar panels for Sunseap Group.
  
  
• SGD22.7m worth of new contracts won
  These comprise a mix of repair & redecoration (R&R) and addition & alteration (A&A) projects, as well as the single-largest renewable energy installation job won by ISOTeam to date (SGD6.3m). 
  
  

  ♦ Myanmar Projects

  During our visit to Myanmar in May 2016, we noted that ISOTeam had tendered for a few local projects. We expect the results to be known soon and believe the firm has a high chance of winning some of these projects. -- Jarick Seet (photo)

  The latter involves solar panel installation works on 150 HDB blocks.
  
  These new projects are expected to be completed between Jan 2017-Jun 2018. With these new contract wins and the latest proposed acquisition, ISOTeam’s orderbook would likely be boosted to a record high of SGD101m.
  
  Going forward, we expect more projects wins to come from home improvement programme (HIP) projects as well as solar installation works.

For full report, click here.

UOBKH analyst: Edison Chen

• Earnings-accretive deal is positive
  
  

  ♦ Earnings-Accretive Deal

  We opine the deal as a positive as it is earnings-accretive and done at an attractive price. -- Edison Chen (photo)

  We opine the acquisition is a positive as it is earnings-accretive (being a cash-and-treasury share deal) done at an attractive price (1.9x book and 5x historical PE on S$1.7m profit as of FY16).
  
  Other than the seller’s profit guarantee, management also shared its confidence on the subsidiary and its ability to perform going forward, given that Rong Shun historically wins and executes S$15m-20m of projects a year with pre-tax margins in excess of 12%.
  
  
• Earnings Revision/ Risk
  
  Maintain BUY and raise our DCF-derived target price to S$0.60, based on 10% WACC and 0% terminal growth.

For full report, click here.