briefing8.15@ FY15 results briefing last week. ISOTeam's net attributable profit was $8.1 million, up 34.1% year-on-year. A 1.15-cent dividend has been proposed, up from 1.0 cent in FY14.


Photos by Leong Chan Teik


ISOTEAM's Repairs & Redecoration (R&R) business segment was once again a big winner revenue-wise in FY15 (ended June) with higher gross margins to boot and boosting the bottomline to a record $8.1 m.

AnthonyKoh8.15CEO Anthony Koh.But how did margins expand from 22.2% to 29.6% when rising labour costs have been a bug bear?

Economies of scale did help: There were more jobs and some were bigger ones, which motivated ISOTeam's sub-contractors to quote lower prices, explained ISOTeam CEO Anthony Koh at a results briefing last week.

(R&R projects are largely painting jobs for HDB flats. In FY2015, ISOTeam did R&R work on 445 HDB blocks, compared to 252 blocks in the previous financial year.)


RichardChan8.15General Manager Richard Chan.In addition, with ISOTeam gaining a higher profile after its IPO in 2013, more contractors have stepped forth to work with it, resulting in more competitive sub-contracting bids, added Mr Koh.

Group gross margin stood at 24.7% but going forward, it will be more sustainable at around 20%, said CFO Tan Wei.

Sub-contracting costs accounted for 60% of ISOTeam's R&R total costs in FY15, down from 67% in the previous year.

ISOTeam outsources 75-80% of its R&R jobs, locking in sub-contracting costs when it is awarded contracts.

DavidNg8.15Executive chairman David Ng.In FY15, the R&R segment raked in $54.5 million in revenue out of ISOTeam's record revenue of $81.7 million. 

ISOTeam estimates that its market share of the R&R pie is about 24%
.

Record order book


The near term prospects look good. As at end-June 2015, ISOTeam's orderbook stood at a record high of $84.7 million for delivery over the next two years.  

This suggests that post-General Election, there will still be a steady demand for  HDB jobs. ISOTeam also expects to benefit from the expanding housing pool (public & private) in Singapore which over the long term will need ISOTeam's services. 

In the meantime, the company is awaiting confirmation of another $14.4 million worth of contracts for which it is the lowest bidder.

Another development to look out for is the HDB's new Home Improvement Programme for which ISOTeam has been invited to tender this month (Sept).

ISOTeamFC8.15ISOTeam CFO Tan Wei.

At possibly $30-55 million each, the contracts are much larger than R&R ones which typically are of a few million dollars.

In its 'others' business segment, ISOTeam is involved in coatings & paintings works, commercial interior design, home retrofitting, landscaping, leasing services, waterproofing and green solutions. 

Still in the early phase of growth (FY15: $9.8 m revenue), it does bear watching. 

And there is a handyman portal launched on 18 Aug this year, www.isohomecare.com, which offers home maintenance services directly by ISOTeam or by its sub-contractors. 

These developments will be keenly watched by shareholders, among whom are
 Nippon Paint Singapore (which owns a 5.93% stake in ISOTeam) and Asdew Acquisitions (slightly below 5%).

 

Comments by fund manager

Wesley Widjaja of Ascapia Capital, which manages a stake of slightly under 5% of ISOTeam, spoke at the results briefing. His key points:

1. Unique play: ISOTeam is the only listed company of its kind on SGX and is, somewhat inaccurately, often compared with construction companies.  ISOTeam's business has none of the characteristics of construction companies -- a highly cyclical and fragmented industry, and poor returns on capital.

2. High entry barrier: In the R&R space, the top 3 players, including ISOTeam, command 70% of the market. They have been around for 15-20 years and it's difficult for new entrants to emerge as it's almost impossible to get a track record in the first place. 

3. Return on capital: ISOTeam's return has been consistent in the past 3-5 years. Its ROE has been in the high teens and even above 20% in the past four years. Its capex, unlike for construction companies, is very low as a percentage of cashflow and revenue. Reason: ISOTeam's projects have very short cycles, and are almost service in nature.

ISOchart9.15Stock closed recently at 53 cents for a PE of 8X and dividend yield of 2.16%.
Chart: www.FT.com

4. Valuation: ISOTeam undeservedly trades at about 6X PE ex-cash, the same valuation of some construction companies. 

5. Professional management: The three founders of ISOTeam (David Ng, Anthony Koh and Danny Foo) run the company professionally and do not have family members in the company, unlike some companies which do. Worse still, they may pay these family members salaries that are disproportionately high compared to their work contributions.

 


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