THE CONTEXT

 

For 2 decades or so, ISOTeam was a resilient business based on recurring projects to maintain and retrofit public infrastructure in Singapore such as HDB block facades and hawker centres.

The pandemic dealt a blow to its profit track record -- it reported S$47.3 million in total net losses for FY2020-2021-2022.


 But it has since worked through contracts which turned out to be loss-making or barely profitable when the pandemic delayed project execution and jacked up labour and other costs.

thumbsUP 2024 Thus, for FY23 ISOTeam (market cap: $31 million) eked out $1.3 million in net profit. In 1HFY24, it demonstrated its better self with S$1.4 million profit and a higher gross margin.

 

Read what SAC Capital makes of that below...



Excerpts from SAC Capital report
Analysts: Ng Ming Ci, Daniel & Matthias Chan


Profitability Rebound


1H2024’s Strong Performance driven by Strategic Focus - 1H2024 revenue came in at S$62.7m, a 16.5% yoy increase, largely attributable to the Group’s divestment of non-core businesses in December 2022 and its sharpened focus on its core construction-related segments.

The key segments – Repair and Redecoration (“R&R”), Coating & Painting (“C&P”) and Addition and Alteration (“A&A”) experienced a 30.1% yoy increase in combined revenue to S$52.7m.

This substantial growth more than compensated for the 25.0% yoy decrease of S$3.3m in the Others segments, further validating ISOTeam’s strategic refocus.

ISOTeam rev margin1H241H2023 gross profit margin increased yoy to 13.3% from 9.3%, due to significantly fewer low-margin pandemic projects. This has led to the improvement in net profit to S$1.4m, a 34.0% yoy increase.

It’s noteworthy that ISOTeam’s net profit for 1H2024 has already surpassed the net profit recorded for the entire FY2023, standing at S$1.3m.

This achievement underscores our optimism regarding ISOTeam’s outlook for FY2024, anticipating a continuation of this upward trajectory.

Strong Order Book - ISOTeam’s renewed focus on its core competencies in R&R and A&A has yielded tangible results, evident in its growth of its order book.

As of April 2024, ISOTeam’s order book stands at an impressive S$184m, the highest since Jun 2021.

As lower margin pre-Covid projects near completion, ISOTeam is poised to benefit from higher-margin projects tendered, supporting its operations until June 30, 2025.

This anticipated increase in margin across ISOTeam’s business segments is a promising indicator of future profitability.

Furthermore, ISOTeam’s strong balance sheet provides a solid foundation for its operational and expansion needs.

The Group’s cash and bank balances have seen a notable increase, rising to S$11.3m from S$6.8m over a year ago.

Drone CEOKoh3.24

Pioneering a New Era in Painting Technology - ISOTeam’s strategic investment in AI drone technology is a pivotal step towards operational excellence.

The company is in its late stages of developing autonomous painting drones, which reduces reliance on labor and tackles rising manpower costs.

Additionally, this technology could potentially become a new revenue stream when leased to external parties.

Favourable Dividend Policy - The last 4 years have been an unprecedented period arising from the pandemic, which resulted in a pause in the group’s dividend payout.

Moving forward for FY2024 and FY2025, the company plans to distribute at least 25% of the net profit after tax for FY2024 and 30% for FY2025.

This is a notable increase from the previous policy which targeted 20% of profit after tax, reflecting ISOTeam’s positive outlook, supported by its strong order book and renewed profitability.

Positive Industry Outlook - ISOTeam finds itself well-positioned within the rebound in local construction and built environment, aligning with positive industry forecasts.

According to BCA, a steady uptrend in construction demand is expected, with projections extending to 2028.

The backlog of projects, including neighborhood renewal programs, repair and refurbishment projects exacerbated by the disruptions of the Covid-19 pandemic, is now poised to fuel a surge in tender invitations.

Additionally, ISOTeam believes that with the upcoming Singapore general elections, the Singapore Government is expected to carry out more infrastructure upgrades and development projects.

As a key player in such upgrading works in public projects, ISOTeam stands to capitalise on these opportunities.

Risks - Rising manpower and material costs and current high interest rate environment may impact the cost of borrowing.

However, ISOTeam has made concrete steps to tackle such issues.

For example, to cope with future uncertainty in rises in manpower costs such as the recent reduction of foreign worker quota from 1:7 to 1:5 in the construction sector, ISOTeam’s involvement in the development of autonomous painting drones reduces reliance on labor.

Valuation - The company is currently trading at 8.5x P/E and 0.8x P/B.

 

Full report here

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