Singapore’s built environment comprises mainly residential and commercial areas. These require regular repair and upgrading, as mandated by government regulations. This has spawned demands for building maintenance and refurbishment services.  

Isoteam Ltd  (SGX: 5WF) is a leader in Singapore’s building maintenance and estate upgrading industry. It is one of the rare listed companies in this sector, having floated its share in 2013.  

In this article, we will take a closer look at its financials, growth prospects, and how it had been heavily involved in Singapore’s estate upgrading scene. 

Business Overview 

Isoteam provides repair, maintenance, and upgrading services to building owners and town councils under its Repairs and Redecoration (R&R) division. The Addition and Alteration (A&A) division undertakes government renewal projects such as the Neighbourhood Renewal Programme and Hawker Centres Upgrading Programme. 

In FY2019, A&A contributed half of the total revenue. As for R&R, it’s share of total sales was 20%.

The group is also involved in other aspects of maintenance work, such as applying specialised coating and painting to niche industries, providing architectural engineering solutions, and interior retrofitting work. 

In-line with the government’s sustainability efforts, Isoteam branched into renewable energy and solar panel installation through its substantial ownership in Sunseap, one of Singapore’s leading clean energy providers.    

Interestingly, Isoteam also acquired Mobike’s bicycle-sharing license and now operates Singapore’s largest bike-sharing company: SG Bike.

Isoteam’s services and capabilities. Source: 2Q 2020 results presentation

Latest Financials 

In the first half of FY2020 which ended Dec-19, Isoteam recorded lower revenue of $63.8 million. This caused a much lower revenue in the A&A division which fell to $24.2 million.

Source: Isoteam 2Q 2020 results presentation

All other business segments recorded a revenue increase, albeit insufficient to compensate for the lower sales in A&A. 

Isoteam’s gross profit, a key figure of its profitability and cost management ability, fell by 5% to $9.7 million. However, both gross and net profit margins showed substantial improvement.  

Source: Isoteam 2Q 2019 results presentation

In terms of profitability ratios, Isoteam managed to increase its Return on Assets and Return on Equity. This suggests that management did a better job of using its assets and shareholder funds to generate returns. 

Balance sheet strength deteriorated slightly with a lower cash and bank balance, and net current assets. However, nothing is alarming here as the drop is not significant. 

Source: Isoteam 4Q 2019 results presentation

As a company whose revenue depends heavily on the number of projects secured on-hand, it is important to look at Isoteam’s order book. As of end-Jan 2020, the group’s order book stood at $133.3 million to be progressively delivered over the next two years. This is the highest order book figure since Jan-2017.  

Revenue and Gross Profit Trend

Over a longer period, Isoteam’s revenue has been range-bound between $81 million and $83 million till FY19 when it shot up to $136 million. Its gross profit shows a similar trend. Noticeably, its gross profit margin had been decreasing in the past few years. 

Cash Flow Trend

Isoteam recorded a $1.6 million cash outflow from its operating activities in 1H FY2020, much lower than the previous year’s figure.

Further checks reveal that Isoteam’s operating cash flow picture is less than ideal. Its net cash from operations had been negative and worsening in the past three financial years.

Source: Shareinvestor.com

This is a cause of concern since such an irregular cash flow pattern illustrates Isoteam’s inability to convert sales into cash inflow which is crucial to business survival. 

Strengths and Opportunities

Isoteam has a strong reputation as one of Singapore’s top A&A specialists and a preferred contractor for upgrading works. It being one of the rare listed players in the industry is a testament to its strength, which has also provided capital for its expansion into green solutions and engineering consultancy. 

Furthermore, Isoteam is very familiar with public sector upgrading projects. It has undertaken many hawker centres, HDB estates, and residence upgrading projects. It is the exclusive applicant of Nippon Paint Singapore for public housing, and SKK paint for Jurong Town Corporation industrial properties and army camps. Such familiarity would grant it a competitive advantage when bidding for public sector contracts. 

Isoteam has a firm foothold in Singapore’s nascent solar panel sector which the government is leading under its SolarNova programme. It owns a substantial stake in Sunseap which has snagged several major deals to install solar panels on HDB blocks and government sites. We can expect further opportunities as solar technology matures and its installation costs decrease. 

Weaknesses and Threats

Isoteam faces stiff competition from numerous companies in the construction and maintenance sector. While it may dominate the major upgrading projects, smaller players often compete with low bid prices to win projects, especially in the more standard R&R contracts. This leads to low profit margin and makes the company vulnerable to operating loss should revenue suffer a small decline.

Isoteam’s cost structure is largely made up of labour and raw material expenses grouped under Cost of Sales, which amounted to 84.7% of 1H 2020 revenue. Labour cost faces the unfavourable condition of government tightening foreign workers’ supply, while raw material prices are market-determined. Hence, Isoteam needs to move up the maintenance and upgrading value chain to have more pricing power. It is already diversifying into clean energy solutions, but results would take time. 

Conclusion

Based on FY2019 earnings per share of $0.237, Isoteam is currently trading at a price-earnings ratio of 5.5. Its closest peer, Boustead Singapore Ltd is trading at a price-earnings ratio of 9.1 at point of writing. 

While Isoteam is an interesting small-cap company with visible business opportunities from the public sector, investors can’t expect explosive growth. The Singapore market is small, and the maintenance and upgrading sector is fragmented, resulting in fierce competition and thin margins. 

It is not a dividend play too as seen from its declining cash flow from operations which is not sustainable for long term dividend payment. 

Hence, investors who are interested in its shares would need to conduct thorough research to understand the risks and rewards clearly.   

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