ISO Team

UOBKayhian on 2 Aug 2013

Investment Highlights

• A market leader in a growing defensive sector. As one of Singapore’s largest repairs and redecoration (R&R) service provider, ISO derives a stable revenue stream of S$13.9m-16.8m (46.8-63%) from its R&R segment from FY10 to FY12. With regulations on the repainting of buildings every five years, this sector is of a highly recurrent nature. In FY12, ISO served 10 of the 16 town councils in Singapore. With the growing influx of BTO flats and increase in government spending for amenities (eg hawker centers, sheltered linkways), we believe there is room for growth in this defensive business segment. Management projects a 15-20% growth for the R&R sector. ISO is also the exclusive applicator for Nippon Paint and SKK(S) in the public housing R&R sector. 

 

• The government is ISO’s largest customer. With an established track record of redecorating over 1,500 buildings in Singapore, ISO is the preferred contractor of local government agencies. For the last three FYs, ISO derives 80% of its revenue from government and government-related agencies

• Going private. With its dominance in public sector projects, ISO is planning to replicate its success in the private sector. Private sector projects are expected to have a higher gross margin of more than 20% as compared to public projects’ margin of 15-20%. A successful breakthrough into the private sector will provide an additional avenue of growth for the group and boost profitability. Some of ISO’s recent private projects include United Square façade upgrading and Sim Lim Tower repainting works.

• Record orderbook. As at 9 Jun 13, ISO’s orderbook stood at a high of S$80.5m. According to the prospectus, ISO is also the lowest tenderer for S$32m worth of projects that have yet to be awarded. Given ISO’s quality contractor status, we believe the S$32m project tenders are well within reach. Together with ISO’s existing orderbook, the group is expected to have a record orderbook of S$112.5m, providing strong earnings visibility for the next two years. 

Our View

• With increased infrastructure spending and the entry into the private sector market, ISO has positioned itself as a growth stock supported by positive industry dynamics. We like the stock for its defensive business nature and strong growth potential. ISO enjoyed a net profit CAGR of 19.5% from FY10 to FY12.