By Ernest Lim
ISOTeam (ISO) caught my attention. Despite sitting on a record order book, ISO has tumbled approximately 44 percent from an intra-day high of $0.385 on 10 April 2018 to close near a four year low at around $0.215 on 10 January 2019. The share price decline was attributable in part to its 4Q18 surprise loss announced in August 2018 (financial year ends in June-2018). Nevertheless, my gut feel is that 4Q18 should mark the trough in earnings and results should improve on a quarter on quarter basis in the next few quarters.
As this company is a potential turnaround play, I have arranged meeting with Executive Director and Chief Executive Officer Mr Anthony Koh, and General Manager Mr Richard Chan, (collectively as Management) last month.
ISO has grown from a company focused in doing repairs & redecoration (R&R) & addition and alteration (A&A) projects in 2014 (when I first met them) to a multi-disciplinary company which provides complete solutions to the built environment. See Figure 1 below for its business segments.
Fig 1: ISO complete solution provider
Key takeaways from the meet-up
1. 4Q18 Loss On Non-recurring Factors
ISO reported a 4Q18 net loss of $2 million in August 2018. Overall, FY18 net profit dropped 71 percent from $6.4 million in FY17 to $1.9m in FY18. This drop was mainly attributable to the following factors, some of which are likely to be one off:
a) Resistant To Change In Bidding Strategy For R&R Projects
In FY18, there were less R&R projects put up by the town councils for public tender last year, with more L2-grade jobs in the $1-2 million range, which is a highly competitive space with many smaller players.
Amidst the heightened competition, ISO has initially been resistant in changing its bidding strategy for R&R projects so as to maintain its gross margins to be above 20 percent. However, with the loss incurred in 4Q18, management has decided to change their bidding strategy by lowering their gross margin requirement by a few percentage points.
Nevertheless, they believe that such change is necessary and beneficial for the group as a small sacrifice in margins is likely to bring about a significant increase in volume of R&R projects secured. This change in strategy is apparently successful as ISO announced on 19 November 2018 that they have clinched seven R&R projects worth $10.8 million. On 9 January 2019, ISO announced a further three R&R contract wins amounting to $9.8 million.
b) Start Up Investments in 1st HIP project;
ISO has incurred some start-up costs for its 1st Home Improvement Progamme (HIP) project such as buying 80 sets of temporary toilets (costs $5,000 each toilet), construction equipment, container office, platform etc. Some of these are one-time investments which they can be subsequently used for other projects. Furthermore, with the experience of its 1st HIP project, it is likely that they may achieve better margins for subsequent HIP projects;
c) Projects Previously Incurring Losses
Overseas projects in Myanmar and Malaysia have incurred some losses in FY18. ISO has since reduced the headcount and has altered its strategy. For Myanmar, ISO is working with Singapore developers who want to develop projects in Myanmar, making it easier to do business and for payment collection.
Similarly, for Malaysia, ISO has also significantly reduced its headcount. Together with its joint venture partner, they plan to change strategy to develop boutique project (i.e. develop a small piece of land with 50-80 units and sell, i.e. its partner’s forte) or / and manage foreign worker dormitory (ISO’s forte). As of now, both Malaysia and Myanmar businesses have stabilised.
ISO’s SG Bike is one of the three bike companies (the other two companies are Chinese firms Mobike and Ofo to be awarded a full license by LTA.) ISO has seen encouraging signs from SG Bike. In fact, it has broken even in October 2018. Together with its partners, ISO intends to roll out family bikes in 1Q19 along the parks to capture another segment of the market. In addition, SG Bike may perform better in 2019 as Ofo seems to be having problems with cash flows, customer refunds etc. Furthermore, GrabCycle, one of the three companies to be awarded a sandbox licence, has decided to give up its pursuit in the bike-sharing space.
2. Record order books – May Get stronger
With reference to its annual report (see Chart 1 below), its order book size is usually on average $93.6 million. However, it has recently been winning contracts and in a short span of less than two months, ISO has announced $72 million worth of contracts from 19 November 2018 through 9 Jan 2019! As of 9 Jan 2019, ISO’s order books have reached $143 million, the highest since the Group’s inception more than twenty years ago. This is approximately 1.7 times of its FY18 revenue.
Chart 1: ISO’s Order Book Trend
Source: Company’s annual report 2018
Management is positive that the order books can be maintained, or may even increase due to the following trends / developments:
3. Bright HIP Project Outlook
ISO has participated in the bidding for 2 HIP projects, one of which is known and announced on 2 January 2019. On 2 January 2019, ISO announced that it won its 2nd HIP project worth $26.3 million (its first HIP project clinched on January 2017 was around $17.5m). My understanding is that the other HIP contract (in the bidding process) encompass three to four precincts, hence it is reasonable to assume that the contract size may be larger. However, there is no certainty that they may get the other HIP contract.
Besides the size of HIP project being larger, the number of HIP projects is likely to increase significantly due to two new developments. Firstly, HIP I has been expanded to include HDB blocks that had been built prior to 1997. Management believes this will open up opportunities for another 230,000 flats, equivalent to approximately 30 HIP projects a year! Secondly, the introduction of HIP II for flats which are 60-70 years old will open up another large pie for them to tender in the long term. As the flats will be older then, there may be more areas to upgrade which may naturally result in the contracts to be larger.
b) Visible Increase In R&R Projects
Management observes that there is a visible increase in R&R projects being up for tender. At a dialogue held as part of a welcome dinner at the inaugural Bloomberg New Economy Forum in Singapore in Nov 2016, our Prime Minister Lee Hsien Loong said it is always possible to bring the election forward (earlier than Jan 2021).
Based on past observations, there seems to be an increase in R&R projects, or other projects up for tendering, ahead of the election. As ISO works with all 16 town councils in Singapore, this puts them in good stead when it comes to project bidding.
c) Sunseap Spells Opportunities
Based on an article on The Edge, Sunseap is building one of the world’s largest offshore floating photovoltaic (OFPV) systems to be located north of Woodlands Waterfront Park, along the Straits of Johor.
Based on 9 January 2019 announcement, Sunseap has awarded the $11.3 million offshore floating solar project to ISO, comprising of the supply, design and installation of Offshore Grid-tied Solar Photovoltaic Systems. This is a milestone for both Singapore and ISO. The success of this project (to be completed by September 2019) is expected to open similar opportunities locally and around the region.
d) Largest Single Contract Win
In May 2018, ISO announced that it was awarded its single largest contract amounting to $46.5m from a leading integrated resort group with expected completion on Mar 2019. If they can successfully complete such a large contract on time, it may open doors to other contracts of such nature.
4. Cost savings of $0.5-$1 Million On A Steady State Basis
ISO has just consolidated all its operations by shifting to Changi North in April 2018. Cost savings, stemming from venue rental, dormitory costs, reductions in operational and administrative expenses are likely to be seen in FY19F onwards with greater savings likely seen in FY20 as ISO continues to streamline its operations. Cost savings may be around $0.5 – $1 million on a steady state basis.
In addition, ISO is exploring the possibility of closing down, or streamlining certain business units because of duplication in capabilities. They are also exploring avenues to improve productivity through job redesign and retraining, as well as investing in talent by upgrading the skills of workers who have performed well.
5.Possibility of disposal gains
Based on its annual report 2018, management plans to unlock value by selling two properties at Kaki Bukit and Serangoon. Such sales if materialises, may result in an approximate $3 million gain.
6. Recurring Income From Energy-Saving Solutions
ISO announced on 25 September 2018 that it has entered into a collaboration agreement with Thai company Centerlise, to exclusively distribute and install Centerlise’s air centre hardware and equipment as well as its software systems locally.
Based on ISO’s press release, Centerlise’s advanced algorithm cloud-based software automatically fine tunes air conditioning and water systems resulting in up to 30 percent in utility savings while maintaining optimum performance. Its application is compatible with any building with central air conditioning or chiller plants. Management believes that energy-saving solutions are highly relevant in this time and age amid climate change, and they are already seeing some encouraging response from potential customers.
ISO is not the only one interested in this segment. Based on a Bloomberg article dated 13 December 2018, KKR is putting in as much as $45 million in Barghest Building Performance (BBP), a Singapore provider of energy-saving solutions (Management cites BBP as one of its direct competitors in energy-saving space). Going forward, this field is likely one of the areas where global private equity firms such as KKR, TPG and Bain Capital LP may focus on for their impact investing strategies. (Impact investing, in simple terms, is investing with the aim of achieving both financial return and social benefit)
7. Sunseap – Potential IPO In 2019?
ISO has invested $5 million into Sunseap via its Series C preference shares in May 2017. Based on an article published in South China Morning Post on 9 August 2017, Sunseap has plans to do an IPO as early as 2018. Should Sunseap IPO in 2019, ISO may be able to get good returns from its investment.
In view of its bright industry prospects and potential new revenue streams, valuations seem undemanding for ISO based on price-to-book value (P/BV). Based on Figure 2 below, ISO is trading at one time P/BV vis-a-vis its 5-year average P/BV of around 1.9 times. My personal view is that PE may not be such an accurate representation as 4Q18 registered a shocking loss which resulted in FY18 net profit to be extremely low.
Fig 2: ISO 5-Year Valuation
Source: Bloomberg 10 January 2019
With reference to Chart 2 below, ISO is trading near 2014 lows. Chart is bearish with the down sloping exponential moving averages. However, indicators such as RSI, MACD and MFI are exhibiting bullish divergences. ADX closes at 16.9 amid positively placed directional indicators, indicative of a sideways trading pattern. My guess is even though chart is bearish, it may not drop too much given the low ADX and bullish divergences from the indicators. However, as ISO is extremely illiquid and hence tricky to have an accurate picture. Thus, I will like to emphasise, the above chart analysis is just a rough guide only.
Near term supports: $0.205 / 0.195 / 0.180 / 0.172
Near term resistances: $0.220 – 0.225 / 0.240 – 0.250 / 0.275
Chart 2: ISO at a 4-year low price
Source: InvestingNote 10 January 2019
As usual, there are many risks involved, especially in small caps. In my opinion, some obvious risks are execution risk, illiquidity risk and consideration of time horizon.
Execution is key to bring about the desired effects, ranging from project delivery, execution in new business segments, success in streamlining operations and reducing cost etc. Any serious hiccups in either of these areas may have an adverse effect on the company.
Based on its latest annual report 2018, the top 20 shareholders have about 82.8 percent of ISO’s outstanding shares. Average 30D volume amounted to around 49,000 shares only. This is not a liquid company where investors can enter or exit quickly. Against the backdrop of our volatile market, ISO may swing quite a bit if there are sudden sellers or buyers.
Consideration Of Time Horizon
In my opinion, even if 4Q18 marks the trough in operating performance, it may take some time for ISO (probably a couple of quarters) to generate good results on a year on year comparison. Nevertheless, my guess is that there is likely sequential (i.e. quarter on quarter) improvement in results, barring seasonal effects like Chinese New Year.
Valuations may be high if PE is used
With reference to Fig 2 above, using Bloomberg’s data, ISO is trading at 32.1 times PE. However, it depends on which valuation measure one uses. My personal view (I may be wrong) is that PE may not be such an accurate representation as 4Q18 registered a shocking loss which resulted in FY18 net profit to be extremely low.
The Above List Of Risks Is Not Exhaustive
To keep my write-up concise, the above list of risks is not exhaustive. Readers are advised to refer to the analyst reports HERE and ISO’s website HERE. You can also refer to ISO’s prospectus for more information on the risks etc. In addition, you can also contact ISO’s investor relation August Consulting if you have any queries regarding the company.
My personal view is that amid its strong order books, bright outlook for its business segments especially HIP, R&R projects, collaboration with Sunseap and Centerlise, it is likely to be a turnaround play in FY19F with more evidence of improvement likely to be seen in 2H19F. Nevertheless, readers have to be cognisant of (just to cite a few) illiquidity risk, execution risk etc.
P.S: I am vested in ISO and have informed my clients in December when ISO was trading around $0.195.
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