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Is ISOTeam over-rated?

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ISOTeam, a Catalist-listed company that specializes in eco-conscious Repairs and Redecoration (“R&R”), Addition and Alteration (“A&A”) and complementary niche services specialist in Singapore, announced a set of mixed financial results for 9MFY17. The group maintained its net attributable profit at S$5.1 million for the nine months ended 31 March 2017 despite a 5.2% dip in revenue to S$61.2 million.

One question that I have been asking myself is whether ISOTeam is over-rated. ISOTeam is Nippon Paint’s exclusive applicator of paint works for R&R projects and both companies had formed strategic partnership over the years with Nippon Paint taking up stakes of approximately 5.93% in ISOTeam through a shares placement in 2014.

Despite this, investors must realize that the R&R segment is an extremely low barrier industry and basically many companies can do the jobs that ISOTeam are doing. To put things into perspective, the exclusive applicator of Nippon Paint would not provide much competitive advantage for ISOTeam.

At the end of the day, when public organizations or companies tender R&R jobs, it is all about dollars and cents. The company which can do the jobs “cheaper, faster and better” will win the contracts.  This is apparently the case when ISOTeam’s topline in both 3Q2017 and 9M2017 was affected mainly by the decline in revenue generated by its core R&R business, which had faced intense price competition.

To differentiate itself from its competitors, ISOTeam has no choice but to move up the value chain and offers business solutions that use new technologies. Simply focusing on R&R projects will not help the company to grow as ISOTeam lack the investment moat to ward off competition from its rivals, especially the big boys.

Its recent $5 million investment in Sunseap is considered a step in the right direction as the partnership is expected to reap more opportunities for ISOTeam in the renewable energy installation segment and enables the Group to participate more actively in the Singapore government’s SolarNova Programme which calls for 350 MWp of solar power in Singapore by 2020.

ISOTeam

In the Group’s most recent announcement, ITG-Green Technologies, a wholly owned subsidiary of ISOTeam, recently launched a product it jointly developed with E-Organic Solutions Pte Ltd. called Cockroaches, Mosquitoes and Odour (CMO) Remover. It is a water-based treatment that uses enzymes from edible plants to destroy pathogenic organisms that resides in cockroaches, thereby killing such pests.  Tampines Town Council will be the first Town Council to use this product. The group expects other Town Councils to use this product in the next 12 months.

Singapore market is too small and saturated for ISOTeam to entrench its business. To illustrate this point, for 9M2017, revenue from the group’s R&R segment fell 53.4% year-on-year to S$15.0 million mainly because of price competition in the industry. To mitigate this risk, ISOTeam has so far acquired six subsidiaries and incorporated two overseas subsidiaries in Myanmar and Malaysia, and is working to fully unlock and maximise synergies from these units.

Due to the merger and acquisition activities, ISOTeam’s cash and bank balances stood at S$19.4 million as at 31 March 2017 as compared to S$34.1 million as at 30 June 2016. Gearing remains manageable at 0.6 times. Net Asset Value per share was 19.86 Singapore cents as at 31 March 2017. Based on these results, ISOTeam’s balance sheet appears fairly healthy but its share price seems inflated. After hitting a high of $0.43 in February 2017, the share price fell to $0.355 in recent days.

My observation of many SGX penny stocks is that they tend to perform brightly in the initial years and then somehow fizzled out because the management ran out of ideas to engineer future growth. Subsequently, many of them become “living dead” with very low trading volume for many years, resulting in the classic case of value traps. With such low liquidity, divestment of these stocks would be a big issue for investors.

Of course there were success stories in Singapore stock market like Sheng Siong which debut with IPO price of $0.33 and then evolved to become a mid-sized cap stock within 5 years. But they were the exceptions rather than the norm.

Hence, the next few years will be critical for ISOTeam because a lot will depend whether the management is able to grow the group to the next level. To continue expanding, it is essential that ISOTeam continues to enhance capabilities through acquisitions and other business partnerships to broaden revenue streams and build greater resilience and sustainability.

Its acquisitions and partnerships will enable ISOTeam to establish new skills in maintenance solutions but to be frank, these are not game-changers that can change the fortune of ISOTeam drastically.

Check out my previous analysis on ISOTeam below:

  1. ISOTeam secured a series of contracts
  2. ISOTeam shines in stock market
  3. ISOTeam
  4. Is ISOTeam an undervalued stock?

Fortune favors the brave. To find more success, it may be time for ISOTeam to start expanding its overseas venture aggressively and gain market share in foreign markets. The perennial thinking among local business owners is that they should first conquer Singapore market and then start looking for overseas expansion. Such conservative thinking may not be flawed but then again, concentrating the business solely in Singapore may be even riskier than tapping overseas market. After all, Singapore’s market is so small and there are only so many public projects going around.

In my own opinion, ISOTeam’s intrinsic value should be about $0.20 to $0.22 per share. Judging at the current form, the share price still has some leg room to continue dropping. I would avoid investing in this counter until management come up with a brilliant game-plan that would help the company to leap-frog to the league of mid-size cap. Till then, enjoy the ride.

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SG Wealth Builder

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Updated: June 15, 2017 — 6:48 am

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