SINGAPORE (Feb 18): Margins pressure is forcing RHB Research to downgrade ISOTeam to “neutral” with a lower target price of 23 cents from 42 cents previously despite the latter achieving a record order book.

RHB is lowering its FY19F-22F PATMI by 63%, 51%, 43% and 29% as margins continue to decrease due to competitive pricing although management is said to be looking for means to lower its costs and has taken up steps to consolidate and streamline its business units.

“We are adopting a wait-and-see approach in the meantime as there could be some upside potential from improved margins from new contracts, successful cost optimisation and unlocking value from the sale of Kaki Bukit and Serangoon properties,” says lead analyst Lee Cai Ling, “The key risk to our forecasts is price competition, which could lead to even lower margins.”

The group is looking to realise a profit of $3 million upon the disposal of the assets.

2Q19 revenue increased 93.1% y-o-y to $45.9 million on the back of a strong performance across all business segments, particularly addition and alteration (A&A) works and coating and painting (C&P). As a result, 1H19 revenue increased 49.7% y-o-y to $73.1 million.

2Q19 gross margin was 11.5% vs 21.3% in 2Q18 and 17.9% in 1Q19.

In 2Q19, ISOTeam achieved a record order book of $132.8 million including a contract worth $26.3 million, in providing HDB an upgrade and a $22 million contract for the installation of a floating solar panel.

See: ISOTeam wins contract to install Singapore's largest offshore floating solar panel system

See also: ISOTeam wins HDB Home Improvement Programme contract worth $26.3 mil
The research house is forecasting margins for these projects in the range of 13-15%, below the 24-26% level which the group enjoyed in the past.

“We think a challenging macro environment may persist for some time and, as a result, projects with lower margins,” says Lee.

Therefore, she is revising gross margins for FY19F-22F to 13%-15% from 24-25% and net profit margins to 2-4% from 8-9%.

As at 12.08pm, shares in ISOTeam are down 1 cent at 21 cents or 10.1 times FY20F earnings.