• Maintain BUY with new DCF-backed Target Price of SGD0.31 from SGD0.29, 24% upside, 2% yield.
• ISOTEAM LTD. (SGX:5WF) entered into a conditional sale and purchase agreement for the acquisition of Pure Group, which specialises in project and construction management. This acquisition would add SGD3m and SGD5m to our FY20F-21F NPAT.
• We believe having Pure Group on board offers ISOTEAM access to new markets, and the former’s expertise in project and construction management is also highly complementary to the latter’s engineering services and solutions business.

Profit Guarantee for Pure Group Purchase

• The agreement entitles ISOTEAM to earn-out payments if Pure Group achieves minimum profit after tax targets of SGD3m and SGD5m in FY20F and FY21F.
• The aggregate purchase consideration of SGD24m will be funded through 50% cash, and the remaining 50% would be settled by issuing non-listed transferable warrants (further details of the deal are on page 3 of PDF report attached below).

Better and Bigger Head

• Currently in the Singapore, Malaysia and Myanmar markets, the onboarding of Pure ISOTEAM’s presence regionally to the Philippines, China, and Thailand. Furthermore, it enhances Singapore, and overseas.
• Notable clients of Pure Group in the past included the Singapore Integrated Resorts (IR), Vanguard Hotels South-East, and Swarovski SEA, among others.

The SGD9bn’s Two IRs

• In exchange for the exclusivity for the casino licences to be extended to end-2030, both Marina Bay Sands (MBS) and Resorts World Sentosa will invest SGD9bn to develop and rejuvenate their non-gaming components.
• With the collaboration between Pure Group and ISOTEAM, we believe there will be improved chances of clinching upcoming projects from the expansion plan, as both parties had previously worked with MBS. ISOTEAM’s track record includes The Bird and Lavo F&B outlets, as well as a SGD46.5m nightclub project in MBS.

Maintain BUY

• Maintain BUY with higher DCF-backed Target Price of SGD0.31 (WACC: 5%, TG: 0%).
• If the deal goes through, we should see an upward revision to ISOTEAM’s future earnings. As such, we revise our FY20F-21F earnings to SGD9.4m (+45%) and SGD12.1m (+70%), to reflect the Pure Group acquisition.
• Our DCF-based Target Price is derived based on a fully diluted basis. We further assume that the cash consideration will be funded through 50% equity financing, and 50% bank borrowings.
• Key downside risks are if the deal falls through, reduced order intake, lower margins, and a negative outlook of the building maintenance and estate upgrading industry in Singapore.

Source: RHB Invest Research - 25 Jul 2019