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ISOTeam (ISO SP) - UOB Kay Hian 2017-01-12: Earnings-accretive Deal At A Good Price

ISOTeam (ISO SP) - UOB Kay Hian 2017-01-12: Earnings-accretive Deal At A Good Price ISOTEAM LTD. 5WF.SI

ISOTeam (ISO SP) - Earnings-accretive Deal At A Good Price

  • ISOTeam announced S$22.7m of new wins and its latest acquisition in a cash-and-treasury share deal with the shares priced at a 5% premium. 
  • We find this earnings accretive acquisition to be a positive and done at a good price as at least a S$13m orderbook and 12% pre-tax margin until Sep 19 will be guaranteed. 
  • We raise our FY17-18 net profit estimates by 15% and 14% respectively. 
  • Maintain BUY with a higher target price of S$0.60 (+13% from S$0.53) on higher-than-expected earnings.



WHAT’S NEW


Acquisition of Rong Shun through a cash-and-treasury share deal. 

  • On 5 Jan 17, ISOTeam announced the acquisition of Rong Shun Engineering & Construction in a S$6.45m deal with 57% in cash and the rest using treasury shares.

Treasury shares to be delivered in three tranches priced at 5% premium. 

  • The treasury shares will be delivered in three tranches at a transfer price 5% above the 30- day volume weighted average before the deadline for each tranche. 
  • The first (S$1.58m) will be settled before the completion date, while the second and the third tranches of S$0.6m each will be settled one and two years respectively after the completion date.

Seller guarantees at least S$3m NTA, maintenance of S$13m orderbook and 12% pre-tax margin until Sep 19. 

  • The seller has guaranteed that as of Sep 16, the NTA will be at least S$3.03m with all account receivables warrantied. 
  • It has also guaranteed to maintain an orderbook of at least S$13.1m with a 12% pre-tax margin until Sep 19.

New contract wins to replenish orderbook. 

  • On 10 Jan 17, ISOTeam announced S$22.7m worth of new project wins, increasing total new contract wins to S$42.8m since the start of FY17. Notably, it has won its largest solar panel installation project worth S$6.3m for 150 blocks of HDB flats from Sunseap. 
  • While the win comes a bit later and smaller than what we had estimated (200 blocks), it nevertheless marks a good start and more should follow for the subsequent phases as Singapore continues its drive for green and renewable energy.


STOCK IMPACT


Earnings-accretive deal is a positive. 

  • We opine the acquisition is a positive as it is earnings-accretive (being a cash-and-treasury share deal) done at an attractive price (1.9x book and 5x historical PE on S$1.7m profit as of FY16). 
  • Other than the seller’s profit guarantee, management also shared its confidence on the subsidiary and its ability to perform going forward, given that Rong Shun historically wins and executes S$15m-20m of projects a year with pre-tax margins in excess of 12%.


EARNINGS REVISION/RISK

  • We raise our FY17-18 net profit forecasts by 15.0% and 14.4% respectively to take into account the earnings-accretive acquisition.


VALUATION/RECOMMENDATION

  • Maintain BUY and raise our DCF-derived target price to S$0.60, based on 10% WACC and 0% terminal growth.


SHARE PRICE CATALYST

  • More contract wins from renewable energy or other new business segments that can propel earnings to the next level.
  • Better-than-expected dividends payout.




Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2017-01-12
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.60 Up 0.530





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