February 18, 2020

2QFY20 gross profit margin improved by 1.9% YoYDue to a higher gross profit margin of 13.4% (+1.9% from 11.5% in 2QFY19) coming from the R&R and Others segments, gross profit was at SGD4.8m, marking a decline of just 9.7% YoY from SGD5.3m in 2QFY19. NPAT and PATMI grew 0.6% YoY and 24.1% YoY to SGD1.3m and SGD1.7m YoY, as a result. 1HFY20 gross margin improved by 1.3% to 15.2% vs 13.9% in 1HFY19 – which should be a sustainable level going forward.

Robust SGD133.3m orderbook: ISOTeam’s sturdy SGD133.3m orderbook is consistent with its orderbook in 1HFY19, which was valued at SGD132.8m. Orders secured in 1HFY20 amounted to SGD86.4m, which indicated an upward trajectory vs 1HFY19’s SGD72.1m and 2HFY19’s SGD70.3m. We believe that the order intake momentum is likely to continue, as the group has enhanced its capabilities and extended its regional presence by acquiring Pure Group in January. Ongoing government initiatives like the expanded Home Improvement Programme (HIP) and HIP II schemes, as well as neighbourhood renewal plans, should keep its momentum of new orders going. We also see pockets of opportunities in areas like BCA Green Mark certification, SolarNova, integrated resorts (ie MBS) expansions, electrical load upgrading projects and future MRT contracts – which may boost its orderbook as well.

Expected to meet full-year profit forecast: ISOTeam’s 1HFY20 revenue (SGD63.8m) and PATMI (SGD2.8m) are equivalent to 39% and 32% of our full-year estimates. With the profit guarantee of SGD3m from Pure Group, we believe that it will meet, if not exceed, our full-year PATMI target of SGD8.8m. So far, the business has not been impacted by the COVID-19 outbreak and has only a limited number of Chinese nationals working in the firm. Management regards this quieter period as an opportunity for businesses (clients) to undertake minor upgrading/renovation works.

We continue to favour ISOTeam during this uncertain environment. The group should also benefit from opportunities stemming from the upcoming general election. Keep BUY and DCF-based SGD0.31 TP, 41% upside with c.2% FY20F (Jun) yield. ISOTeam’s 2QFY20 revenue fell by 22.6% YoY to SGD35.5m on lower contributions from the addition and alteration (A&A) business. This segment recorded a plunge in turnover of 53.4% YoY to SGD14.2m, due to the absence of revenue from the Marina Bay Sands (MBS) projects, offset by double-digit revenue growth across its repairs and redecoration (R&R) and Others business segments.  Maintain BUY by RHB.  Share price closed at $0.21.