ISOTeam

UOBKayhian on 14 Feb 2014

VALUATION

• Maintain BUY but with a lower target price of S$0.505 (previously S$0.55), as we roll forward our forecasts and peg it at 0.4x PEG ratio and FY14F-17F CAGR of 18.9%. Our TP has an implied 7.6x FY15F PE (EPS of 6.7 S cents). The lower target price is due to the lower growth rate (FY14F-17F) from a higher forecasted net profit base year in FY14F.
• Currently, ISOTeam (ISO) is trading at an undemanding valuation of 5.6x FY15F PE with a net cash position of 8.8 S cents/share and dividend yield of 2.7%.

FINANCIAL RESULTS

• 1HFY14 net profit surged 61.4% yoy to S$2.1m, in tandem with a 44% yoy rise in revenue. While net profit forms only 34% of our full-year forecast, we believe that this was due to a timing cut-off in the revenue recognition for some projects, which will be recognised in 2HFY14.
• Gross profit margins declined slightly from 17.7% in 1HFY13 to 16.8% 1HFY14, as cost pressures from rise in foreign workers’ levies mount.
• Passing on the costs. As the rise in labour costs is an industry-wide phenomenon coupled with the short project cycle (6-12 months) of Repairs and Redecoration (R&R), ISO is confident that it will be able to pass the rise in future costs to its major customers - various town councils, by incorporating it in its future project tenders. 90% of its current orderbook is R&R projects. The rest of which are mainly Addition and Alternation (A&A) projects which have a longer project span of 1-2 years. For 1HFY14, R&R and A&A contributed to 67% and 31% of total revenue respectively.
• Balance sheet remains strong with a net cash position of S$0.088/share forming 22% of current market cap. 
• Robust orderbook provide strong earnings visibility. Orderbook continues to remain strong with S$84.6m worth of contracts (of which S$41.4m was secured in 1HFY14). In addition, the group is also the lowest tenderer for two projects (NRP,electrical load upgrading and R&R works at Hougang and Pasir Ris) worth S$9.2m.

OUR VIEW

• 2HFY14 will be a powerful finish to the year. In a seasonally stronger second half of the year, 2HFY14 is likely to be exceptionally strong. In addition to the revenue which has been deferred from 1HFY14, more than 50% of ISO's current orderbook of S$84.6m is also expected to be recognised in 2HFY14, ensuring a powerful end to the year.