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ISOTeam is a leading player in Singapore’s building maintenance and estate upgrading industry
It holds a potentially valuable stake in Sunseap which is expected to IPO by the end of 2021
ISOTeam's order book is at a record high S$193.3 mil and is expected to grow on pent-up demand and recovery of the construction sector
Its solar panel installation segment benefits from the continued focus by the government on renewable energy
Share price remains near the maximum drawdown level of Mar 2020
Implied FY21E P/E of 3.5x on the stub value
ISOTeam is an established and leading player in Singapore’s building maintenance and estate upgrading industry. It has more than 20 years of Addition and Alteration (A&A) and Repairs and Redecoration (R&R) experience and was incepted in 1998.
In FY20, ISOTeam derived the most revenue from its A&A segment (35.0%) followed by R&R (28.7%) and Coating & Painting (C&P) (12.3%). The order of revenue contribution from the business segments has remained constant since FY17.
ISOTeam's key business units benefit from neighborhood upkeeping initiatives by the government as regulatory requirements create the need for recurring maintenance and upgrading.
A key example is the compulsory repainting of HDB blocks once every five years per block which the government sets aside an estimated annual budget of close to S$150.0 million.
ISOTeam has a healthy share of this market and I believe it will continue to thrive as it is the exclusive partner of Nippon Paint and SKK Paint for the public housing sector. In addition, repainting projects come with a five to seven-year warranty to the town councils and the HDB, and thus, as ISOTeam is the exclusive partner, the disengagement of its services could mean the termination of the warranty.
Furthermore, its strong track record and close relationship with the town councils give it an advantage in tendering which is especially important given the ramping up of the billion-dollar HIP I and HIP II programs as the number of ageing flats increases.
Given that ISOTeam is a key beneficiary of the government initiatives, it is no surprise that about 65.0% of its order book is made up of public sector projects which ensures low default risk as seen from no existing projects being cancelled as of 1HFY21 despite the pandemic.
ISOTeam is led by its founders who collectively own 34.4% of the company through Add Investment Holding Pte Ltd. The management has focused on prudence during the pandemic and thus, sold its Kaki Bukit property to deleverage. It also conducted share buybacks in Mar 2020 for a cumulative amount of S$82,858.60 at an average cost of S$0.166, indicating that management believed ISOTeam was undervalued at its buy-in price.
Taisei Oncho Co., Ltd became a significant shareholder on 15 Jan 2020 by purchasing a 14.9% stake at an average cost of S$0.24 per share. On 19 Jun 2020, it increased its stake by 25.0% at an average cost of S$0.24 per share showing its continued strong conviction in ISOTeam.
In addition, Nippon Paint (Singapore) which owns a 4.6% stake has been a long-time significant shareholder. Its ownership stake incentivizes it to continue its exclusive partnership with ISOTeam and ensures ISOTeam's key competitive advantage, the exclusive Nippon Paint partner for public housing, lasts.
1. Total Revenue
FY20 revenue declined 32.9% YoY mainly on decreased revenue recognition. This was due to work stoppages caused by the pandemic starting in April 2020 which resulted in slower completion progress. All projects have resumed by August 2020 and thus, improving total revenue by 31.5% from 2HFY20 to 1HFY21.
2. Net Income to Company
As a result of S$4.8 mil in one-off impairments and high operating leverage, FY20 NPAT declined by 441.1% YoY. However, the decline has reversed upon the gradual resumption of projects which has narrowed the net income to the company from -22.4 mil to -6.0 mil in 1HFY21.
3. Order Book
1HFY21 New Orders declined 42.5% HoH as Singapore firms tightened their cost management and delayed projects. However, as the pandemic eased and pent-up demand built, there was a reversal as S$45.2 mil in contracts were won in the first 2 months of 3QFY21 which was more than the entire 1HFY21. With the strong order wins, I expect the order book to surpass S$200.0 mil in 2HFY21 and provide revenue visibility until FY23.
4. Net Debt
ISOTeam fell into net debt in FY17 mainly due to the acquisition of a S$13.0 mil corporate office. The net debt continued to be dragged lower as the company continued to drawdown on bank borrowings and in FY20, increased its borrowings for working capital needs for certain sizeable projects.
The growing borrowings have caused its Net D/E to increase to 85.6% but its short-term liquidity remains strong with current and quick ratios at 1.32x and 1.28x respectively.
1. Hidden value in its Sunseap Investment
Sunseap is one of the leading providers of clean energy solutions in Singapore with a presence throughout Asia-Pacific including Cambodia, Thailand, Philippines, Malaysia, India, and Australia.
Being an early adopter of sustainable building, ISOTeam invested S$5.0 mil for a 2.8% stake in Sunseap during its Series C round at a valuation of S$179.9 mil. Its early investment could pay off significantly if a Sunseap IPO which Bloomberg reported the possibility of in Mar 2021 eventually goes through. The rumoured S$600.0mil fundraising could possibly indicate a target valuation north of S$1.0 bn which would represent a marked step-up from its S$429.2 mil valuation in Feb 2020 when Banpu bought a 23.3% stake for S$100.0 mil.
Given that Sunseap does not release its financials, I am unable to assess the valuation based on its fundamentals but it is undisputed that the renewable energy market is enjoying extreme euphoria as seen from iShares Global Clean Energy ETF gaining 109.6% since 3 Jan 2020. Through an IPO, Sunseap could capitalize on this market exuberance to raise funds at a higher valuation.
However, I believe ISOTeam's stake has been meaningfully diluted given that Post-Series C, Sunseap has raised in excess of S$278.3 mil.
As ISOTeam's post-dilution stake is undisclosed, I used a sensitivity analysis to demonstrate the potential value upon IPO.
Adopting a post-dilution stake of 1.5% and Sunseap IPO valuation of S$1.5 bil values ISOTeam's stake at S$22.5 mil which represents a potential S$16.1 mil fair value gain as ISOTeam has listed its Sunseap investment at only S$6.4 mil on its balance sheet which I speculate has not been revalued based on Sunseap's Series E valuation.
2. Restart of construction projects
As the pandemic in Singapore eases and construction progress quickens in Phase 3, ISOTeam’s revenue is expected to rebound through increased revenue recognition and new order wins.
Firstly, ISOTeam is able to start clearing the backlog of projects caused by the stop-work orders which provides near-term revenue visibility. This is reflected by management’s expectations that its order book as of 1H21 will support activities until the end of FY23. In addition, the continued relaxation of workplace restrictions should quicken project progress and benefit revenue recognition.
Secondly, ISOTeam’s contract wins are recovering as it benefits from the pent-up demand created by the pandemic. This is evident as its order wins in the first 2 months of 3QFY21 is more than the entire 1HFY21. It is important to note that management is cautiously optimistic that the recovery in order contracts will continue as projects re-start after the forced stoppage of work in 2020. If the trend continues, the NTM order wins should surpass that of FY20.
In addition, ISOTeam is expected to rebound post-pandemic better than its construction peers as its revenue is mainly recurring in nature meaning lower potential drop-off in revenue once pent-up demand dissipates.
The resumption of projects and increase in order wins have significantly improved 1HFY21 as shown in the financial highlights. With the trend of strong order wins expected to remain intact, a stronger 2HFY21 can be expected.
3. Increase in Green Building Initiatives by the Government
As an early adopter of sustainable methods for the built environment, ISOTeam is poised to be a beneficiary of the increase in green building initiatives by the government.
a) Launch of the Solar Nova program
Solar Nova is a program to accelerate the deployment of solar photovoltaic (PV) systems in Singapore.
In 2019, Sunseap won the tender to install over 170,000 solar panels on HDB rooftops, estimated to be completed by Sep 2022. ISOTeam directly benefits from this as its investment in Sunseap came with a clause that half of all the installation work it wins must go to ISOTeam.
Given that ISOTeam is the installer, it is plausible that it would also conduct maintenance. ISOTeam’s CEO mentioned a long-term maintenance plan in 2019 but there has been no follow-up news since. But if it were to go through, it would provide another stream of recurring income.
In addition, there continue to be more solar panel installation projects such as the sixth tender to install solar panels across 1,198 HDB blocks and 57 government sites which HDB called for in Mar 2021. As ISOTeam gains a track record of solar panel installation, it could be engaged for more projects and thus, fuelling a new driver of growth.
b) Offshore Floating Solar Panel Systems
In 2019, ISOTeam was awarded an S$11.3mil contract to install one of the world’s largest floating solar panel systems. As Singapore grows its solar capacity, it can be expected that more floating systems will be installed.
In 2019, ISOTeam’s CEO mentioned a potential larger floating solar project that could be 10x the size of the project stated above. If the project comes to fruition and ISOTeam wins the tender, it would add significant value to ISOTeam’s order book.
It is expected that ISOTeam will continue to grow its solar panel installation revenue as the reliance on renewable energy increases in Singapore.
I used a sensitivity analysis to demonstrate the various scenarios of ISOTeam's post-dilution Sunseap stake and calculated the implied stub value by deducting the value of ISOTeam's stake from its market cap.
Then, I used the stub values and street estimate (S$7.0 M) of ISOTeam's FY21 Net Income Normalized to calculate the implied FY21E P/E.
This gives a wide range of implied FY21E P/E based on stub value calculation from NA (which implies its Sunseap stake is greater than its market cap) to 6.3x.
Adopting a post-dilution stake of 1.5% and Sunseap IPO valuation of S$1.5 bil gives an implied FY21E P/E of 3.5x on the stub value.
If the post-dilution stake and street estimate NPAT calculation are accurate, I believe the implied FY21E P/E multiple to be low given that ISOTeam has always traded above 9.2x TTM P/E from 2016 until the end-2019. In addition, the defensive and recurring nature of ISOTeam's revenue is unlike that of the cyclical revenue of other listed construction companies and thus, deserves a higher valuation.
Share Price Movement
Despite the positive news flow on the approval for the restart of about 85.0% of construction projects and a potential Sunseap IPO, ISOTeam's stock price is still near the maximum drawdown level of Mar 2020 and has underperformed the STI by 41.5% pts since 2 Jan 2020. This could indicate that its Sunseap stake is unknown to the broad market and the recovery of its core business is being overlooked. It also means that the Sunseap IPO is not heavily baked into the share price and thus, if the IPO were to fall through, there would not be a significant negative effect on the stock price.
At S$0.134, it is trading at 44.2% below Taisei Oncho's first buy-in price on 15 Jan 2020 and 19.1% below the average share buyback price in Mar 2020.
1. Sunseap IPO
If Sunseap were to IPO, it would allow ISOTeam to mark to market its stake that could potentially in a bull case, be worth a significant amount relative to its market cap. This would be a strong re-rating catalyst and provide confirmation to our speculation about the value of ISOTeam's stake.
If it were to divest its Sunseap stake post-IPO, the proceeds could be used to issue a special dividend, pare down its debt and/or conduct value-accretive M&A.
Expected Date: End of 2021
2. Strong 2HFY21 results
A marked improvement in 2HFY21 revenue and reversal back to profitability would indicate a strong recovery and allow ISOTeam's stock to start screening well again that could possibly lift investor sentiment.
Expected Date: August to September 2021
1. Uncertainty over tendering of contracts
ISOTeam wins most public sector projects through tendering, thus its ability to win more contracts depends on the competitiveness of its tender proposals.
Despite the uncertainty, ISOTeam has fared well by achieving about a 33.0% win rate in 2018 as it changed its strategy by lowering its gross profit margins per contract and instead focusing on scale. As mentioned earlier in the article, ISOTeam’s good track record and relationship with the town councils continue to help it be invited for many tenders.
2. Stock illiquidity due to low market cap
Given its low market cap of S$46.7 million, ISOTeam's stock is illiquid potentially causing large bid-ask spreads.
3. Rising labour-related costs
Due to the pandemic, the construction workforce needs to be tested for Covid-19 every two weeks and the cost of testing is borne by the employers.
This additional cost will compress gross margins in the short term but I believe that going forward, the increased costs will be factored into new tenders and post-pandemic, with the stoppage of testing, the gross margin should revert back to normal.
ISOTeam is currently trading near rock-bottom valuations despite its improving core business and positive news flow on a potential Sunseap IPO. I believe the stock will re-rate should its 2HFY21 financial results show a marked HoH improvement and Sunseap formally releases an IPO announcement. In the meantime, I will continue to monitor its order wins and Sunseap IPO developments.
Thanks for reading,
Disclaimer: We are long ISOTeam Ltd. (SGX:5WF) at an average price of S$0.125. This article is not an investment (buy/hold/sell or otherwise) recommendation, this is only for educational and discussion purposes. This article is not tailored to the specific circumstances of any reader. I/we/The Snowball do/does not purport to be in the business of providing financial advice and the contents of the article should not be regarded as such.
Cover photo by Macau Photo Agency on Unsplash
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