• Downgrade to NEUTRAL with a lower DCF-derived Target Price of SGD0.23, from SGD0.42, 5% upside.
• We lower our FY19F-22F PATMI by 63%, 51%, 43% and 29% as margins continue to decrease due to competitive pricing.
• We understand that management is looking for means to lower its costs and has taken up steps to consolidate and streamline its business units.

ISOTeam Achieved a Record Order Book

• ISOTEAM LTD. (SGX:5WF) achieved a record order book of SGD132.8m including a contract worth SGD 26.3m, in providing HDB an upgrade and a SGD 22.0m contract for the installation of a floating solar panel.
• ISOTeam's 2Q19 revenue increased 93.1% y-o-y to SGD 45.9m on the back of a strong performance across all business segments, particularly A&A and C&P. As a result, 1H19 revenue increased 49.7% y-o-y to SGD 73.1m.

2Q19 Gross Margin Was 11.5% Vs 21.3% in 2Q18

• ISOTeam's 2Q19 gross margin was 11.5% vs 21.3% in 2Q18 (-46.0% y-o-y) and 17.9% in 1Q19 (-35.7% q-o-q).
• We think a challenging macro environment may persist for some time and, as a result, projects with lower margins. Therefore, we revise our gross margins for FY19F-22F to 13%-15% (previously: 24-25%) and net profit margins to 2-4% (previously: 8-9%).

Order Intake Momentum Likely to Continue

• ISOTeam achieved its record order book of SGD 132.8m as at 31 Jan 2019 and it would be executed progressively over two years. As mentioned, we included in our forecast margins for these projects in the range of 13-15%, below the 24-26% level which the group enjoyed in the past.
• Quarterly results may have some fluctuation depending on the projects being carried out. We estimate the order intake momentum will continue.

A Wait-and-see Approach

• The sector remains challenging, but we expect to see some improvements on the back of cost-savings initiatives and a slight improvement in margins for new contracts.
• There is also a potential unlocking of value from its two properties at Kaki Bukit and Serangoon; the group looks to realise a profit of SGD3m upon the disposal of the assets.

Downgrade to NEUTRAL

• Downgrade to NEUTRAL and a lower DCF-backed Target Price of SGD 0.23 due to margins pressure (WACC: 6.9%, TG: 0%). Low margins continue to be a major concern for the ISOTeam.
• 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.
• The key risk to our forecasts is price competition, which could lead to even lower margins.

Source: RHB Invest Research - 18 Feb 2019