52-Week range: $0.29 – $0.425
Last closing price: $0.425 (as of 27th January 2016)
- Strong order book, growing at 5.2% since its IPO in 2013
- Government policies are beneficial to ISOTeam’s business
- Defensive yet niche service offering
- WHAT BUSINESS IS IOSTEAM IN?
Source: ISOTeam’s website
ISOTeam is a company specialized in building maintenance and estate upgrading in Singapore. ISOTeam operates in mainly in Singapore. In 2016, ISOTeam ventured its operations into Myanmar and Malaysia.
ISOTeam have four core business segments. Namely:
- Repairs & Redecoration (R&R) – Offers regular building maintenance and improvement
- Addition & Alternation (A&A) – Offers infrastructural improvement
- Coating & Painting (C&P) – Offers coating and painting service
- Others – Offers complementary niche service such as Landscaping and loaning of equipment
Here is an ISOTeam revenue breakdown based on 2016 annual report:
3. POSSIBLE REASONS TO INVEST IN IOSTEAM
3.1 BENEFICIAL GOVERNMENT POLICIES & PROJECTS
According to Building & Construction Authority (“BCA”), building owners are required to paint the exterior of the building at an interval not exceeding five years. This means that ISOTeam is able to enjoy recurring revenue in its C&P segment in the future if strong customer loyalty is built.
Besides strong C&P sector, ISOTeam can benefit from government’s plan to upgrade and improve public housing. ISOTeam has been awarded several public contracts by the Town Council to upgrade and improve the neighbourhood. A notable project would be upgrading works in Serangoon Neighbourhood Centre. ISOTeam service offering are well-aligned with government’s initiative.
Looking forward, BCA expects the public construction expenditure to grow to $37 billion in 2020 from $33 billion in 2016. This shows the strong demand for public construction and upgrading despite weak economic outlook.
3.2 STRONG ORDER BOOK
Since its IPO in 2013, ISOTeam has been enjoying growing order book over the years. Based on its 2016 annual report, the order book is expected to be delivered between 2017 to 2018. This shows that ISOTeam has a sizable revenue stream for the next 2 years.
3.3 DEMAND FOR RENEWABLE ENERGY
With Singapore Government plans to increase the adoption of renewable energy, ISOTeam early adoption to offer eco-friendly solution enable them to enjoy early mover advantage. Coupled with its strong track record, I believe that ISOTeam will be able to secure more renewable energy projects in the future.
3.2 MANAGED BY FOUNDERS
Based on 2016 annual report, David Ng Cheng Lian, Anthony Koh Thong Huat and Danny Foo Joon Lye are holding Executive Chairman, CEO and Director of Operations respectively. These founders hold the majority of the shares in ISOTeam. This shows that founders of ISOTeam have a strong vested interest to ensure the long-run profitability of the company.
4. FUTURE PLANS
According to its 2016 annual report, it aims to increase its market share by focusing its R&R and A&A segment. ISOTeam plans to participate in more public projects in the future to increase its market share in that segment.
To increase its revenue stream, ISOTeam is planning to venture into regional markets and also cleaning service in the future.
5. FINANCIAL PERFORMANCES
Since its IPO in 2013, ISOTeam has been generating higher gross profit margin over the years. This shows that ISOTeam has some form of economic moat.
Despite decreasing in both Returns on Equity (ROE) and Return on Assets (ROA), ISOTeam still delivers a very strong returns. I believe that the strong growth opportunities in the future would enable ISOTeam to deliver decent growth as well.
6. POSSIBLE RISKS
- Execution risk. ISOTeam is actively involved in acquiring companies to expand its strategic capabilities. One needs to be mindful that Merger and Acquisition (M&A) may help to increase market share but it might also destroy shareholder’s value if it is not handled properly. In the case of Sprint and Nextel, Sprint (the acquiring firm) failed to realize the synergy that was previously envisioned. However, ISOTeam seems to be performing well with its recent acquisition of TMG.
- Succession risk. Although it has 3 founders managing the company, a succession plan needs to be well-laid to groom their successor. In my opinion, succession risk is not an area of concern in the short-run but it will eventually grow as their founders aged.
7. VALUATION & CONCLUSION
ISOTeam is very well-aligned to the Singapore Government building policies and vision. Unlike other building and construction companies in Singapore, ISOTeam focuses in providing upgrading and maintenance solution to its clients. This makes it a highly defensive stock as ISOTeam is relatively immune to weak building demand coupled with its strong order book. The unique position of ISOTeam makes its plausible for it to enjoy strong growth in the years ahead.
Target Price: $0.51 (potential upside: 19% as of 27 January 2017)
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Research Analyst, Mind Kinesis Value Investing Academy
Mind Kinesis Investments Pte Ltd & Value Investing Academy is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information provided in these notes represent a recommendation to buy or sell a security.