On 12/5/15, I purchased ISOTeam Ltd at a cost of $0.61. However, due to a overseas work trip, I had not been able to do a writeup on this purchase. So, without further ado, let’s explore more about this company.
ISOTeam Ltd is an established player in the building maintenance and estate upgrading industry in Singapore. It has two main business divisions – R&R (Repair and Redecoration) and A&A (Addition and Alteration) in which it has been operating for for the past 15 years. The company has completed over 230 projects and rejuvenated over 2,500 buildings all over Singapore since its inception.
The R&R division involves services like repainting, redecoration, repairs, waterproofing and reroofing, improvements, routine maintenance. Under this area, ISOTeam Ltd has been the exclusive applicator for SKK and Nippon Paint in painting projects for HDB blocks. This market is protected by government regulations in that the exterior facade of HDB blocks is to be repainted at 5 year intervals. Thus, the market enlarges when the population of Singapore and subsequently the number of flats grows. The company’s main customers are usually town councils where the company is tasked to repair and redecorate hawker centres and blocks of flats.
The A&A division involves services like neighbourhood renewals, and hawker/estate upgradings. Essentially, the company spruces up and revitalises our environment and surroundings. The company is a beneficiary of the government’s initiatives like neighbourhood renewal programme (NRP), hawker & estate upgrading programme (HUP & EUP) as well as electrical load upgrading (ELU).
The company has reportedly been the lowest bidder for many projects, though price has started to become less important nowadays. Timeliness and quality are important aspects as late submissions and poor quality would result in a loss of income for stakeholders like hawkers, etc. In the public arena, no one would want to lose the trust and votes of residents/stakeholders, thus a strong track record is certainly important.
Taking a look at the financials, we see that ISOTeam’s revenues and earnings have been growing consistently over the past few years.
*Net Profit for 2012 and 2013 includes one-off gains of $0.9 million and $3.1 million.
If we were to take away the one-off gains, the company has still seen both its top and bottom line grow, especially in FY14, where its revenue and earnings grew exceptionally. (from $2.9 mil to $6.1 mil in earnings). The net profit margin has also seen a general uptrend in the past 4 years.
In the past 2 years, majority of the company’s revenue stems from the R&R division. R&R projects have slightly higher margins than A&A projects, but A&A projects tend to be larger in its size.
*Taken from FY14 Presentation Slides
The company is also in a net-cash position, which makes its ROE figures respectable. Dividend payout averages around 20% for FY13 and FY14, which gives the company ammunition to continue growing. Although the company has just listed for 2 years, its financials are undoubtedly strong.
The company’s management has also led the company well since inception. It has used some of its IPO proceeds to make strategic acquisitions which help to complement its primary business. SGD11m was used to acquire the following companies:
1) Accom International Pte Ltd – a rental provider of more than 166 construction and renovation equipment that include boom and scissor construction lifts;
2) Accom Pte Ltd – a repairs & redecoration (R&R) specialist in the private-commercial sector;
3) Industrial Contracts Marketing (2001) Pte Ltd – an application specialist in special architecture coatings and structural protection systems to the building and construction industry; and,
4) Rong Shun Landscape & Construction Pte Ltd – a high-value landscaping services provider whose portfolio includes green roofs, vertical gardens and wet land floating planting services.
As we can see, the businesses helps to increase ISOTeam’s equipment supply, and helps path its way into new business segments. The total acquisition was carried out at a reasonable PE of 6.8x, which is lower than that of ISOTeam’s, making the deal earnings accretive. The company aims to become the preferred partner for total maintenance solutions, and is venturing into the interior renovations and green technology space, along with setting up a handyman service portal to penetrate individual households.
Another point I like about its management are the relationships that it continues to pursue by placing out shares to key stakeholders. I believe there is no better motivation than to increase the stake one has in the company. ISOTeam has placed out shares at a cost of $0.50 to its strategic partner, Nippon Paint earlier this year, doubling Nippon Paint’s stake in the company to 5.93%. This is a sign of a strong relationship, and shows a vote of confidence from Nippon Paint. Earlier this year, the main shareholders sold off part of their stakes, totalling around 6% of the company’s shares to 12 key employees of the firm at a cost of $0.51. Although it is usually never good seeing the majority shareholder selling, transferring one’s shares to key employees to align their interests with that of the main shareholders is a positive move. It shows that the management is inculcating a sense of shared purpose and do not mind sharing the spoils with their team.
One main risk that I foresee regarding this investment would be the rising labour cost that is plaguing the construction industry. With a larger headcount, management needs to contain its costs well to preserve its margins. Another would be its market size which though growing, is still currently limited to Singapore. So far, it seems that management has preferred to use equity financing (on 27 May 15, it was announced that the company plans to issue up to another 9 million shares to investors at $0.58) rather than debt financing, and this can be both a good and bad thing. In lieu of rising interest rates, equity financing would keep the balance sheet healthy but might dilute earnings if placements are done at a large discount. The cost of equity might also be greater than the cost of debt, but I will not dwelve into the specifics here. This is another area that I would have to keep a lookout for.
At my purchase price of $0.61, the company is trading at a PE of 11.8 and a dividend yield of 1.7%. It definitely is not cheap when you compare it to other construction companies, but I would say it is a fair price to pay for a strong company that has a wider moat than its peers. Only time will tell how this investment turns out, as this growth story would take time.
Disclaimer: The author owns shares in the abovementioned company. The ideas expressed in this blog should not be construed as an enticement to buy or sell the securities, commodities or assets mentioned. The accuracy or completeness of the information provided cannot be guaranteed. Readers should carry out independent verification of information provided. No warranty whatsoever is given and no liability whatsoever is accepted for any loss howsoever arising whether directly or indirectly as a result of actions taken based on ideas and information found in this blog.