• Upgrade to BUY from Neutral, with an unchanged TP of SGD0.12, 20% upside. ISOTeam had a tough FY21 (Jun) and FY22, with the latter financial year hit by a one-off impairment as well as lower margin due to a sudden surge of operating and raw material costs. For FY23F, the company has managed to secure contracts with appropriate margins, accounting for the rise in labour and raw material costs. As a result, we expect profitability to return, and believe the worst is finally over.

• Higher margin on recent contract wins. As labour and raw material costs surged, contracts that were negotiated and agreed on in the past became unprofitable and its GPM was heavily impacted, which resulted in ISO’s net loss of SGD10m in FY22. However, we expect the company’s new contracts to have factored in much better pricing and, therefore, margins – this should help engender its return to profitability in FY23F.

• Strong orderbook of SGD160.2m. As of 30 Jun, its orderbook stood at SGD160.2m, with projects expected to support the company’s activities through FY24F. A good portion comprised projects that were secured post- COVID-19 at an appropriate pricing strategy. ISO has further lifted its orderbook with additional contracts totalling SGD49.8m, which it announced on 22 Aug.

• Embracing technology to improve efficiency. In FY22, ISO embarked on the usage of drones for facade inspection with H3 Dynamics, and collaborated with Acclivis Technologies and Solutions as well as Nippon Paint (Singapore) to develop a drone that can be used for painting. Looking ahead, it intends to focus on exploring more opportunities in the renewable energy installation space.

• Brighter outlook ahead despite challenging environment. Management continues to embrace technology and digitalisation that will enable the company to be more productive and less labour reliant. It also continues to prioritise cash conservation and cost control to overcome the current situation. We expect profitability to return as margins improve from executing orders secured with better pricing, which should enable the turnaround. In addition, most of the kitchen sinking and write-offs exercises have likely been incurred and should be absent in FY23F.

• Using our in-house proprietary methodology, we derive an ESG score of 3 out of 4 for this stock – which is on par with the country median. As such, we apply a 0% ESG discount/premium to our TP.

• Key downside risk: Continued rise in raw material and labour costs.

Source: RHB Research - 15 Sep 2022