| • ISOTeam's reputation as a sustainable business with recurring profits has taken a big knock in recent years. It reported S$47.3 million in total net losses in FY2020-2021-2022.
• Contracts that it clinched before the pandemic turned out to be loss-making ventures when the pandemic delayed project execution and jacked up labour and other costs.
• The last of those contracts are over and done with. New contracts are priced with margins that factor in current costs. Its orderbook is bulging for its building maintenance and estate upgrading services in Singapore.
• Read UOB KH's report on how things are shaping up nicely for ISOTeam.
Excerpts from UOB KH report
ISOTeam: Niche Contractor With Earnings Turnaround And Beneficiary Of Singapore Election
|ISOTeam is a leading contractor of maintenance works in Singapore with a turnaround in net profit in FY23 of S$1.4m, after three years of losses.
It achieved a record orderbook of S$194m in FY23 and we expect this to grow from more government contracts for maintenance works, ahead of the upcoming election.
ISOTeam’s resumption of dividend could provide about 6.2% yield for FY25.
It is trading at 7x FY24F and 5x FY25F PE, based on Bloomberg consensus estimate.
• Established building maintenance and estate upgrading player with multi-disciplinary capabilities. ISOTeam is a major construction player in Singapore with two decades of experience in its main business areas of repairs & redecoration (R&R) and addition & alteration (A&A) services.
Till date, ISOTeam has undertaken more than 800 refurbishment projects for over 7,200 buildings. ISOTeam offers other services through its subsidiaries, ranging from coating & painting (C&P), mechanical & electrical works (M&E) to interior designing (ID).
ISOTeam has introduced eco-conscious solutions for building and estate upgrading projects ahead of competitors with capabilities in green roofing, cool painting and solar panelling.
It has also recently ventured into the usage of AI for drone painting and inspection to improve productivity, safety and reduce manpower costs.
• Recurring nature of business to provide a constant stream of revenue. Many projects undertaken by ISOTeam are driven by legislation which provides a recurring demand.
These include a five-year R&R project cycle for all HDB blocks, the Neighbourhood Renewal Programme every 12 to 15 years, Building and Construction Authority checks every seven years and the ongoing upgrading of hawker centres and parks.
Currently, 85% of ISOTeam’s revenues come from recurring governmental businesses.
It is confident of a steady demand for its services with an influx of new projects by regulatory bodies focusing on eco-conscious elements in R&R and A&A projects where ISOTeam has an edge in.
• Strong orderbook priced at better margins provide good earnings visibility and higher margins. ISOTeam’s latest orderbook of S$194m as of 3 Aug 23 is at a 10-year record high and will be progressively delivered by FY26.
We understand that these orders are priced at better gross margins that are around pre-COVID-19 level of 15-20%, relative to legacy contracts with gross margin of around 10%, as the drag from low-margin legacy contracts during the pandemic have been fully delivered.
ISOTeam is back to profitability after three years of losses with FY23 net profit at S$1.3m and is also witnessing strong contract win momentum with S$153.4m new jobs secured in a year as of Aug 23.
|We understand that these orders are priced at better gross margins that are around pre-COVID-19 level of 15-20%, relative to legacy contracts with gross margin of around 10%, as the drag from low-margin legacy contracts during the pandemic have been fully delivered.|
ISOTeam is positive that the upcoming General Election by FY25 will keep the number of new projects high. In addition, its recent rights issue raised S$10.3m could help it tender for more new projects.
• Resumption of dividend payout offers 6.2% FY25 yield and attractive PE multiple valuation. Pre-pandemic, ISOTeam had been consistently paying out dividends for seven years at a payout ratio of at least 20%. The last dividend paid out was in 2019 at S$0.0042 per share.
In the latest dividend policy announcement, ISOTeam has raised its dividend payout ratio to at least 25% for FY24 and at least 30% for FY25.
Based on ISOTeam’s targeted payout ratio of 30%, FY25 dividend yield according to Bloomberg consensus estimates of S$6m earnings would equate to a S$0.0026 dividend per share, or a yield of around 6.2% based on a share price of S$0.042.
ISOTeam is currently trading at 7x FY24F and 5x FY25F PE, based on Bloomberg consensus estimate.
Full report here.