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RHB lowers TP for ISOTeam to 4.8 cents, but notes that earnings turnaround is taking shape

Nicole Lim
Nicole Lim • 3 min read
RHB lowers TP for ISOTeam to 4.8 cents, but notes that earnings turnaround is taking shape
Analyst Alfie Yeo says ISOTeam’s revenue has exceeded expectations, but overall margin improvement has yet to keep up with forecasts. Photo: Albert Chua/The Edge Singapore
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RHB Bank Singapore analyst Alfie Yeo has lowered his target price for ISOTeam from 5.4 cents to 4.8 cents, following the building maintenance company’s 1HFY2024 results ended Dec 31, 2023. 

However, the analyst has maintained his “buy” call, noting that ISOTeam’s earnings turnaround is taking shape, as it recorded earnings of $1.4 million for the 1HFY2024.

This is a 34% increase compared to its earnings of $1.1 million the same period last year, what Yeo considers to be “sequential improvement”. 

The analyst says that revenue growth was largely driven by the repairs & redecoration segment, which grew 60% y-o-y to $26 million. Older projects with lower margins (which previously experienced cost overruns) are being completed while newer projects (tendered at better margins) are now contributing. 

Meanwhile, ebit margin improved 1.7 percentage points (ppts) to 4.2% sequentially on more efficient operational expenditure.

However, even though ISOTeam’s revenue has exceeded Yeo’s expectations, its overall margin improvement has yet to keep up with the analysts’ forecast. This has led to lower-than-expected earnings, he adds. 

See also: UOB Kay Hian sees Civmec's bid to shift domicile to Australia a positive move

As such, Yeo has cut ISOTeam’s FY2024 - FY2026 earnings by 10% - 12% to $3.4 million to $5.5 million. He now believes that gross margin recovery may take slightly longer to recover and has lowered his margin assumptions to a milder recovery. 

“Gross margins are trimmed to 13% - 15% from 15% - 17% while ebit margins are cut to 5% - 6% from 6% - 7%,” says Yeo. “Our earnings are cut by 10% - 12% despite raising our topline forecast slightly to account for better-than-expected revenue traction going forward.”

Despite all of this, Yeo maintains that ISOTeam’s growth outlook remains positive, with a strong order book of $182 million, the highest since 1HFY2021. 

See also: UOBKH keeps ‘buy’ and TP unchanged on BRC Asia, sees bullish medium-term outlook

Citing the Trade and Industry Ministry’s advanced estimates, construction gross domestic product grew 9.1% y-o-y in 4QCY2023 and momentum could continue well into 2024. 

With elections slated for no later than end 2025, Yeo expects the government to carry out more development and upgrading works ahead of the polls. 

“These bode well for ISOTeam, as it is a leading player in carrying out upgrading and development works for public projects, which include facade enhancement and home improvement programmes, repainting and upgrading works at Housing & Development Board flats, town councils, neighbourhoods, hawker centres, parks, and government buildings. Its orderbook could be boosted by more of such projects,” he says. 

Even though Yeo has lowered his earnings estimates, he says that the stock still trades at a compelling 7x FY2024 P/E. His new target price is based on 9x FY2024 P/E.

As at 11.17am, shares in ISOTeam are trading flat at 3.8 cents.

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