ISOTeam

UOBKayhian on 28 Oct 2013

Valuation/Recommendation

• Maintain BUY and target price of S$0.55. ISO is trading at 5.9x 2014F PE.

What’s New

• New contract wins as order winning momentum continues. With its latest contract wins of S$19.1m, ISO now boasts a robust orderbook of S$100.1m with earnings visibility till FY16. As the industry market leader, ISO has enjoyed a strong order winning momentum, securing S$29.9m worth of contracts since its IPO in Jul 13.
•  Repeat sales continue to flow from major customers. ISO continues to secure contracts from repeat customers like SKK, which have contributed to ISO’s revenue for the past four FYs. With its established track record and strategic relations with customers, ISO has been enjoying high repeat sales of more than 70% from major customers in the last three FYs.
•  Successful breakthrough into new market. Of note, ISO’s new contract wins include repair and redecoration (R&R) works in three private sector projects. A satisfactory delivery may see ISO establish a presence in the private sector and provide a new source of revenue for the company. At present, the private sector R&R market is estimated to be worth about S$80m (40% of the public sector market).

Investment Highlights

• 50% of earnings are defensive and of recurring nature. Supported by regulations to repaint buildings at least every five years, the R&R industry is relatively defensive. For the last three FYs, the R&R segment contributes to about 50% of ISO’s net profits.
• Growing market, growing profits. Earlier in August, MND unveiled plans for three New Towns - Bidadari, Tampines North and PunggolMatilda, which will add 40,000 new public housing units. As part of thegovernment’s plan to build 700,000 new homes by 2030, this bodes well for ISO with a growing market for both its R&R and Addition and Alternation (A&A) segments. Gross profit from R&R and A&A recorded a 3-year CAGR of 6.4% and 13.2% respectively from FY10 to FY13.
• Strong earnings growth and visibility. Underpinned by the strongearnings visibility from its orderbook, positive operating dynamics and expansion plans into the private sector, we expect core earnings of ISO to increase by 129.7% to S$6.3m in FY14.