• Maintain BUY and SGD0.05 TP, 27% upside. We remain positive on ISOTeam as its earnings turnaround is taking shape. 1HFY24 (Jun) earnings have shown sequential improvement. The growth outlook remains positive with a strong orderbook of SGD182m, tailwinds from strong construction GDP, and more public projects ahead of Singapore’s next general election. Despite lowering our earnings by 10-12%, the stock still trades at a compelling 7x FY24F P/E. Our TP, based on 9x FY24F P/E, is consequently reduced from SGD0.054 to SGD0.048.

• 1HFY24 earnings below expectations. 1HFY24 revenue grew 17% YoY to SGD63m while earnings grew 34% to SGD1.4m. Revenue growth was largely driven by the repairs & redecoration (R&R) segment, which grew 60% YoY to SGD26m. Otherwise, growth in the coating & painting (C&P) segment (50% YoY; SGD8m) was offset by the addition & alteration (A&A) business (-1% YoY; SGD19m) and others segment (-25% YoY; SGD10m). Gross margins improved to 13.3%, up sequentially (+2.5ppts) from 10.8% in 2HFY23. Older projects with lower margins (which previously experienced cost overruns) are being completed while newer projects (tendered at better margins) are now contributing. EBIT margin improved 1.7ppts to 4.2% sequentially on more efficient opex. Even though revenue has exceeded our expectations, overall margin improvement has yet to keep up with our forecast. This has led to lower-than-expected earnings.

• Cut FY24F-26F’s earnings by 10-12%. Although an earnings turnaround is taking shape, margin recovery has not met our expectations. We now believe gross margin recovery may take slightly longer to recover and have hence lowered our 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%. Our earnings are cut by 10-12% despite raising our topline forecast slightly to account for better-than-expected revenue traction going forward.

• Outlook still positive. The 1HFY24’s orderbook continues to grow, standing at SGD182m (2HFY23: SGD176m). It is also the highest since 1HFY21. Based on the Trade and Industry Ministry’s advanced estimates, construction GDP grew 9.1% YoY in 4QCY23 and momentum could continue well into 2024. With elections slated for no later than end 2025, we expect 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. Key risk: As ISOTeam’s ESG score is on par with the 3,1 country median, we impute a 0% discount/premium to our TP. Downside risk: A continuing rise in raw material and labour costs.

Source: RHB Research - 9 Feb 2024