ISOTeam - Double Happiness – M&A + New Contracts
- ISOTeam is acquiring Rong Shun Engineering for SGD6.45m.
- We deem this exercise positive, as it comes with a PBT guarantee of not < 12% of an existing orderbook that cannot go below SGD13.1m. This works out to a SGD1.6m PBT guarantee, implying just 4x P/E.
- Hence, we lift our FY17F NPAT by 12.6%, which results in our DCF-backed TP being raised to SGD0.59 (from SGD0.54, 48% upside). This implies 13.5x FY17F P/E.
- With SGD22.7m in new contracts boosting ISOTeam’s orderbook to SGD101m, we remain positive on this counter and maintain our BUY call.
Complement the renewable energy business.
- ISOTeam said the proposed acquisition of Rong Shun Engineering & Construction Pte Ltd (Rong Shun Engineering) allows it to have tighter control over costs and work progress. This is given the latter’s in-house mechanical & electrical (M&E) capabilities.
- Additionally, the company said it would be able to also to generate cost savings from additional efficiencies, especially for its renewable energy business that involves the installation of solar panels for Sunseap Group Pte Ltd (Sunseap).
Accretive acquisition with a profit guarantee.
- ISOTeam is acquiring Rong Shun Engineering for SGD6.45m. This exercise comes with a PBT guarantee of not < 12% of an existing orderbook that cannot go below SGD13.1m. This works out to a PBT guarantee of SGD1.6m, ie a 4x P/E that would be accretive to the company.
- This acquisition is to be funded via internal cash flows. The purchase consideration is to be satisfied by ~57% in cash, with the remainder via the issuance of treasury shares in three separate tranches over two years.
SGD22.7m worth of new contracts won.
- These new contracts comprises a mix of repairs & redecoration (R&R) and addition & alteration (A&A) projects, as well as the single-largest renewable energy installation job won by ISOTeam to date (SGD6.3m). The latter involves solar panel installation works on 150 Housing and Development Board (HDB) blocks.
- These new projects are expected to be completed between Jan 2017-Jun 2018. With these new contract wins and the latest proposed acquisition, ISOTeam’s orderbook would likely be boosted to a record high of SGD101m.
- Going forward, we expect more projects wins to come from home improvement programme (HIP) projects as well as solar installation works.
Looking forward to contributions from Myanmar.
- During our visit to Myanmar in May 2016, we noted that ISOTeam had tendered for a few local projects. We expect the results to be known soon and believe the firm has a high chance of winning some of these projects.
Maintain BUY with a higher DCF-backed SGD0.59 TP.
- Due to the new contracts won, and the additional profits from its coming acquisition, we lift our FY17F NPAT by 12.6%. Thus, our DCF-backed TP is raised to SGD0.59 (from SGD0.54), implying 13.5x FY17F P/E.
- Maintain BUY.
- Key risks to our call include an economic slowdown and changes to the labour laws.