Wednesday, 15 February 2017

ISOTeam HY 2017 Results

Results overview


*Operating profit derived after deducting COGS, Marketing and Distribution Expenses, General and Admin Expenses, Finance Costs

Bright spots
  • Increase revenue in A&A, C&P and other business segments by 77%, 67% and 41% that picked up the slack for the fall in R&R segment
  • First contract for HDB Improvement programme of $17.5m– higher profit margin job with usually bigger contract size
  • Single largest renewable energy project at $6.3m
  • Improved GP margin and largely consistent OP margin. Probably mean good cost control and effective integration of acquired businesses

Areas of Concern
  • Big drop in R&R revenue, the main business segment.
  • Still no announcement on major contract in Myanmar
  • Shrinking new orders obtained in this half compared to previous result announcement although total order book at historical high

For ISOTeam, investors are looking at realisation of growth potential in the form of more contract wins translating into improving numbers. Such is the nature and characteristics of a company in a growing market especially in Singapore underpinned by many public sector civil engineering, infrastructural and building maintenance/upgrading projects. Management has also been openly optimistic about the prospect in the industry. Hence a lot of hope has been built into the share price.

It’s a double edged sword. Market optimism will push share price higher, but if the company growth stopped or show signs of slowing, share price will drop more in anticipation that the growth expectation may not materialise.
What are some of the possible reasons for the disappointments mentioned above?
  • Management mentioned of the change in revenue recognition from R&R to A&A. Not entirely sure of how did this work out and its exact impact.
  • I speculate that it could be due to increase competition for the R&R segment with a lot of small players bidding for public sector projects at very competitive price price
  • Discussion in Investing Note revealed that some public sector project was put on hold, or delayed awarding contract

Looking ahead, I need to pay close attention to the following areas, to vindicate that ISOTeams growth trajectory is still intact:
  • Clinching first major contract in Myanmar
  • More contracts for HIP that signify further inroads in this new segment. With bigger contract value, this could give the company better cost efficiency and asset utilisation
  • Continuous contract wins from R&R and A&A, or clear indication that order book is maintained and not shrinking

Valuation wise, according to Shareinvestor, its TTM PE is 12.79, and FY16 PE is 12.51. Compared to Engineering and Construction Industry average TTM PE and FYPE of 17.98 and  20.7, ISOTeam seems to be valued on the cheap side. Of course this just shows us a very rough indication of how is it being valued compared to its peers. Historically, its PE ranges from around 12 – 19.

The industry is growing no doubt. The pie is getting bigger, with the massive number of HDB flats constructed past few years turning 5 years old soon, and the government emphasis in sprucing up old estates, refurbishing old buildings, efforts in building maintenance, aggressive push into renewable energy etc. But concurrently, there is fierce competition from the smaller companies and increasing cost pressure (manpower cost, reduction in foreign workers quota etc.). I feel ISOTeam should gradually shift its focus to the contracts at the upper spectrum of the building maintenance/upgrading value chain, with larger contract size and better margin, putting their expertise and knowledge to better use. Example should be HIP, installation of renewable energy fixtures etc.  Compete on values and expertise for larger jobs, no point fighting over small contracts with the smaller players. 

Overseas market especially Myanmar is critical too due to the much bigger market, and any major contract win is evident of management’s ability to expand overseas, opening up new engine of growth. 

Growth takes time. It may be premature to discount the quality of this company based on one half-yearly results. Investors should be patient to let the management work its magic and grow the company. This is where I choose to place my confidence on the management, given their track record in the past, rich experience in the industry, and clearly aligned interest with the shareholders as company founders with major shareholding. 

Nevertheless we need to pay close attention to subsequent result announcements.

Vested in ISOTeam

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