Aesthetic maintenance and repair company ISO held a briefing for its 1H06/16 earnings last week. Revenue grew 14.7% yoy to S$44.7m and gross profit grew by 27% yoy to S$10.9m. Much of this growth came about on the back of new companies that ISO had acquired and brought into the fold.
Takeaways from the briefing
- 1H16 revenue from the main repair and redecoration (R&R) segment fell 18% yoy to S$24.3m from S$29.3m due to a general slowing down of R&R tenders from town councils during 1H16. This came about largely due to the Singapore General Election in September, which saw town councils put a temporary stay on public work tenders.
- Revenue from other segments increased by 113% to S$20.7m from S$9.7m. This is largely due to the contributions from new companies in the Coating And Painting (C&P) segment and other entities like interior design, waterproofing, landscaping and equipment leasing. This increase more than made up for the slowdown in R&R revenue, and contributed to the 14.7% yoy growth for ISO, which were acquired over FY06/15.
- Overall gross profit for ISO still increased, largely because of a combination of the revenue mix for the works ISO is involved in as well as the realization of cost savings from utilizing expanded internal resources. ISO Access in particular seems to be a high-yield investment for ISO, as ISO Access allows ISO to utilize its own inventory of vehicles as opposed to leasing in additional vehicles.
- Because of the expansion of companies under the ISO banner, overheads increased significantly. Administrative expenses increased 62.9% yoy to S$5.4m from S$3.3m as a result. ISO is in the process of realizing cost synergies for its consolidated operations, and is aiming to lower its overall administrative burden over 2016.
- The orderbook for ISO is at a record high, with S$89.7m of orders outstanding compared with S$84.7m in 2H15. New orderbook additions stood only at S$43.2m in 1H16 comapred with S$55.9m in 2H15, but that is largely attributable to the slowing of R&R tenders in 1H16 due to the Singapore General Election. From 2016 onwards, town council tenders for R&R works are anticipated to pick up again.
- Public sector orders for repair and redecoration works remains high, and ISO is aiming to participate in a greater range of projects. In particular, ISO aims to participate in Home Improvement Programme (HIP) works, which would be similar to the Neighbourhood Renewal Programme (NRP) that ISO currently does work fall and which falls under the Additions and Alterations (A&A) segment of the business. HIP works primarily involve internal fittings for HDBs, but also involve waterproofing and repainting of repaired areas inside the HDBs, which gels nicely with several businesses within the ISO portfolio.
Table 1MND Allocation of public work funds
|
S$m
|
FY2012
|
FY2013
|
FY2014
|
FY2015
|
|
Lift Upgrading Programme
|
425.0
|
289.0
|
150.0
|
23.0
|
|
Neighbourhood Renewal Programme
|
82.0
|
50.0
|
77.0
|
75.0
|
|
Home Improvement Programme
|
220.0
|
221.0
|
253.0
|
401.0
|
|
Enhancement of Active Seniors Phase I
|
0.0
|
6.0
|
4.0
|
14.0
|
|
Selctive En Bloc Redevelopment Scheme
|
247.0
|
92.0
|
76.0
|
90.0
|
|
Community Improvement Projects
|
50.0
|
40.0
|
41.0
|
46.0
|
|
Specific Works Programmes
|
40.0
|
25.0
|
54.0
|
145.0
|
|
Others
|
130.0
|
133.0
|
143.0
|
3.0
|
|
New Projects
|
10.0
|
20.0
|
137.0
|
158.0
|
|
Total
|
1204.0
|
876.0
|
935.0
|
955.0
|
Source: Ministry of National Development
- ISO is pushing for its Myanmar painters, which form the majority of the in-house painting specialists, to be certified for the higher skill qualification. Under the present levy, the monthly levy is S$950 for low skilled workers and S$600 for higher skilled workers. The training fee to upgrade the worker status is S$1100 according to ISO, which means that the higher levy fee is compensated within 4 months. In addition, ISO is looking for a consolidated accommodation facility to house all its workers, which would increase logistical efficiency and realize economies of scale for housing costs. Between the long term savings from worker levy, which in our view are likely to outweigh any pay increases that higher skilled workers will command, and the anticipated cost savings when ISO manages to secure a new housing facility, we think that ISO can lower its ratio of overhead expenses to revenue over 2016.
- The financials for ISO are very strong, with net cash of S$29.2m on equity of S$49.2m. Combined with a positive free cash flow of S$1.24m, this means that ISO is in a very healthy cash position going forward and has a substantial war chest for which it can acquire additional companies and resources to expand its business. NAV per share is 34.2c in 1H16, compared with 32.4c for 2H15.
- Though the newbuild construction sector is not a focus for ISO, spillover effects are still likely to affect ISO in the medium term. Companies providing painting services for new buildings are aiming to enter the same space ISO is involved in, which ISO management acknowledges would lead to a greater degree of price competition for public work tenders. ISO management is of the opinion that the lack of expertise that new entrants have in the HDB repainting market, whereby additional logistical considerations must be factored in due to works being carried out on occupied buildings, would make it too difficult for these new entrants to gain significant market share.
- ISO is looking beyond Singapore as well, aiming to commence operations in Myanmar and Indonesia. The market for repair and redecoration of urban buildings in cities there is burgeoning, and ISOs pool of experienced Myanmar personnel would give ISO a competitive advantage over other foreign entrants.
Analysis
There are a few things to unpack in this company that make it worth further consideration. Firstly, the core business that ISO engages in is unlikely to ever go away. Government spending on public sector works will continue or increase, with only a catastrophic economic crash likely to dry up the funds that the Singapore government will be able to commit to maintenance works – and if such a crash happens, we will all have bigger problems than whether our stocks might continue to pay out dividends. Between HDB grants, town council sinking fund balances and government budgeting for special projects, the continuation of government funding for maintenance and construction related projects allows ISO to be occupying a very comfortable position for a construction-services company in an otherwise down market.
Secondly, the company has been quite adept at identifying complementary businesses to bring into its portfolio. ISO added four companies in 1H06/15, and TMG Projects in 1H06/16. These companies all operated in related spheres, and are mutually beneficial projects for ISO. The larger size of ISO compared to the acquired companies allows these subsidiaries to participate in higher value projects, while ISO gains broader reach. As such, beyond public sector repainting and repair works, ISO is now able to participate in waterproofing, access provision, landscaping, interior design, private sector aesthetic maintenance works and handyman services. While these businesses are not fully integrated within the ISO structure yet and thus have cost overlaps that contributed to the increase in ISO administrative expenses by 62.9% yoy, we find that these businesses have strong synergistic potential with the firm as a whole and that ISO can consolidate costs to achieve greater returns in future.
Finally, the strong company financials and performance has led to the company offering 1-for-1 bonus shares and to implement a dividend policy of up to 20% of profit after tax and minority interests. Overall, the company is on track to grow further.
ISO currently trades at $0.61 with a current PER of 10.2x. A dividend of 1.15c/share was announced for FY06/15, which translates to a dividend yield of 2.5% based on the current share price. Presuming the maximum 20% of net earnings is distributed as dividends in future, annualized dividend for ISO based on 1H06/16 results would be 1.27c/share based on the existing share count.