We initiate coverage with a BUY and a target price of S$0.55, representing a 73.7% upside. Supported by regulations to maintain the landscape of Singapore, ISO is a market leader in a defensive sector that is growing with the population. Challenges in project management and working with tight deadlines are entry barriers into the industry. With a ready war chest and plans to replicate its success in the private sector, ISO is embarking on its next phase of growth.
• In a defensive industry backed by regulations. With the legislation of repainting buildings every five years, ISO is in a defensive industry. Careful management of relations with tenants during ‘live’ projects and tight working deadlines are key challenges to successful implementation of projects. Given the operational challenges, we believe it deters new contractors from entering the industry.
• The market leader with strong track record. ISO is estimated to have a market share of about 20% and 40% for its Repairs and redecoration (R&R) and Addition and alteration (A&A) segment respectively. The defensive R&R sector, which is regulated by legislations, constitutes about 50% of ISO’s bottom-line. With ISO’s established track record and strategic relationships with customers, more than 70% of ISO’s revenue is attributed to repeat sales from major customers in the last three financial years.
• A bigger Singapore supports organic growth. With Singapore’s population projected to grow potentially up to 6.9m by 2030, increased housing and spending on amenities bode well for ISO’s defensive business segments. Revenue from R&R and A&A have seen a 3-year CAGR of 16.3% and 30.1% from FY10-13 respectively.
• Net cash position for inorganic growth. Upon receipt of the IPO proceeds in 1QFY14, ISO would be in a net cash position of S$7.0m (S$0.06/share). Currently ISO derives more than 90% of its revenue from public sector projects.
With plans to expand into the private sector through M&As, this provides a new avenue of growth for ISO. We have forecasted adjusted earnings to grow at a 3-year CAGR of 50.8% to S$9.5m in FY16 underpinned by ISO’s robust orderbook that will provide earnings visibility for the next 6-24 months.
Source : UOB Kayhian Research