Alyssa Tee of KGI Securities has initiated coverage on ISOTeam with an " outperform" call, betting on its strong earnings recovery thanks to margin expansion.

 

" ISOTeam is well-positioned to capitalise on Singapore&rsquo s sustained public sector upgrading and green initiatives," says Tee in her May 8 note, where she has indicated a target price of 10 cents.

 

For its 1HFY2025, ISOTeam reported revenue of $65.4 million, up just 4.2% y-o-y. However, earnings reached $1.9 million, up 36.5% y-o-y, thanks to margin expansion.

 

As of Feb, the company' s outstanding order book was $188.7 million, which will provide earnings visibility through FY2029.

 

" The group is well positioned to capture recurring demand from upgrading, sustainability retrofits, and infrastructure enhancement projects," says Tee.

 

According to Tee, ISOTeam is making good use of technology to improve its operations. Specifically, it is deploying facade cleaning and painting drones which will help improve productivity.

 

Tee likes ISOTeam too for its attractive dividend prospects. The company has guided to pay at least 30% of its earnings for the current FY2025, which to her, is an indication of the company' s confidence in its earnings recovery and robust project pipeline.

 

" ISOTeam&rsquo s dominant position in public sector upgrading, which contributes over 80% of revenue, coupled with expanding exposure to green projects, underpins resilient cash flows and long-term growth.

 

" With a healthy balance sheet, robust project pipeline, and increasing productivity from digitalisation, we expect steady earnings growth and margin expansion over the medium term," says Tee.

Besides building up a robotic workforce, the company is planning to venture beyond just public housing maintenance projects to bid for other public sector projects

 

[SINGAPORE] Anthony Koh may already be 59 years old, but the chief executive officer of ISOTeam is still enrolling himself in artificial intelligence (AI) courses.

 

The head of the facilities management company is banking on automating his workforce through the use of drones, robots and AI to help take his company to the next level of growth.

 

One of them is an indoor robot that is able to paint the interior of a HDB flat. All a worker has to do is input the required settings.

 

&ldquo There are a lot of areas that are still untapped, for example, schools, army camps, JTC buildings. We&rsquo ve got zero market share there,&rdquo he added.

 

The company already had such plans, but could not implement them due to the disruptions brought about by the Covid-19 pandemic.

 

As the built environment and construction industry was one of the hardest hit during the pandemic due to mandated stop work orders, ISOTeam&rsquo s business plunged dramatically.

 

But the company is now reviewing these plans again, after coming out of the woods and returning to profitability, as part of its post-pandemic recovery efforts.

 

Its net profit for the six-month period ending in Dec 31 last year was S$1.9 million, a jump of 36.5 per cent from the same period a year ago.

 

Nevertheless, its share price has not managed to return to pre-pandemic levels of above S$0.15. Ever since its business was hit by the pandemic, its shares have mostly traded below S$0.10, with its latest trading price on Friday (May 2) at S$0.072.

 

Robotic workforce

ISOTeam&rsquo s foray into robotic workforce is not new. The company had already started using drones to conduct facade inspections of public housing flats in 2021.

 

It is now planning to roll out other types of drones that can paint and wash the exterior of public housing flats, and is looking to launch them by the end of the year.

 

&ldquo The ultimate outcome is to replace our vendors... Drones don&rsquo t have to sleep, (I also don&rsquo t have to) pay levies (for them),&rdquo said Koh. 

 

These solutions came about partly as a way to resolve the company&rsquo s reliance on foreign labourers &ndash which became an issue during the Covid-19 pandemic.

 

While pandemic restrictions have been lifted, Koh said that these solutions are still relevant as the industry faces tightening foreign manpower quota. It also helps to cut costs, improve productivity, as well as enhance safety measures, which has been identified as one of the most material environmental, social and governance (ESG) risks for the company.

 

Stable industry

Public sector projects account for 80 per cent of ISOTeam&rsquo s revenue, the majority of which are maintenance services for public housing projects.

 

Koh said that the company is still focusing its efforts on winning projects in public housing maintenance, as it is a very stable industry with little credit risk.

 

Furthermore, there will always be a batch of public housing blocks being recycled for maintenance services every five to seven years.

 

Besides estate maintence, ISOTeam is also involved in installing and maintenaning solar panels on the rooftops of HDB blocks.

 

As the lifespan of solar farms typically lasts for more than 20 years, Koh noted that this provides a recurring income for the company over the long-term.

 

&ldquo (As long as) the government keeps having these kinds of initiatives, we will never be out of jobs,&rdquo he added.

 

Hence, Koh believes it is the right time for ISOTeam to start expanding beyond its comfort zone and start looking at other public sector maintenance projects outside public housing, including schools, army camps and buildings owned by JTC, a government statutory board that oversees industrial development in Singapore.

 

&ldquo I believe that my skill sets will have use (in these projects). (There is still) a lot of room for expansion in our sector,&rdquo he said.

 

He added that ISOTeam occupies a niche space in the sector as the company takes on projects that are worth between S$5 million and S$10 million. These deals are usually too small for major construction companies, but too big for smaller renovation contractors.

 

With margins now back at pre-Covid levels, Koh hopes to focus more on the company&rsquo s core competences and gain more market share.

 

&ldquo By having more market share and better economies of scale, we believe the margin will be improved... At the same time, we are actively looking at our robotic workforce solutions. If it is able to be implemented smoothly, I believe it will improve productivity and profitability,&rdquo he said.

CGS International (CGSI) Research analysts Natalie Ong and Lim Siew Khee have initiated coverage on ISOTeam, expecting the estate maintenance firm to triple its patmi in the current FY2025 ending June 30 on higher margins. 

 

In an April 15 note, Ong and Lim initiate coverage with &ldquo add&rdquo and a 9.6-cent target price, which represents an upside of around 35%. ISOTeam is trading at an &ldquo attractive&rdquo FY2026 dividend yield of 5.2%, they add. 

 

ISOTeam&rsquo s business is highly recurring, supported by various government initiatives, say the CGSI analysts. Its order book grew 9.8% y-o-y in FY2024, reaching a high of $191.3 million at end-FY2024, with some 75% of contracts coming from the public sector. 

 

As at Feb 7, ISOTeam&rsquo s orderbook stands at $188.7 million.

 

ISOTeam posted earnings of $6.5 million for its FY2024 ended June 30, 2024, 363.1% higher y-o-y. 

 

Ong and Lim expect profit margins to improve, driven by the execution of input cost-adjusted pricing on contracts secured post-Covid-19.

 

Also, ISOTeam is using drones for painting works, which the CGSI analysts estimate could reduce painting-related costs by 30%-40% and increase productivity. 

 

Painting constituted 30% of ISOTeam&rsquo s total work undertaken as at FY2024. While there are several players using facade inspection drones in Singapore, ISOTeam is one of the pioneers to use autonomous facade painting drones and indoor painting robots in Singapore.

 

Ong and Lim forecast gross profit margin (GPM) to be in the range of 18%-20% in FY2025 to FY2027, up from 15.5% in FY2024.

 

ISOTeam&rsquo s facade painting drone and indoor painting robot are likely to be ready for internal deployment in 1HFY2026, or the end of this calendar year, say the analysts. 

 

&ldquo Based on our scenario analysis, GPM could reach 27% assuming 100% painting drone utilisation. We believe ISOTeam&rsquo s more competitive cost structure and improved productivity could enable it to increase its market share, specifically in the coating and painting (C& P) segment,&rdquo they write. 

 

Ong and Lim expect to see core patmi to surge, tripling y-o-y in FY2025 and up 26% y-o-y in FY2026. 

 

Potential new revenue stream

 

ISOTeam&rsquo s artificial intelligence-enabled autonomous facade and indoor painting robots will be the first of its kind in Singapore and the company will own all patents and hardware and software rights. 

 

Ong and Lim see potential for ISOTeam to commercialise its suite of BuildTech solutions and believe this is a rerating catalyst, allowing it to establish a new revenue stream involving asset leasing, which is a scalable model that presents geographical diversification opportunities. 

 

The CGSI analysts believe possible targets are Australia and Japan, which have high labour costs. 

 

ISOTeam&rsquo s foray into BuildTech began in 2021. Through a collaboration with technology partners H3 Dynamics and Acclivis Technologies, ISOTeam developed four BuildTech solutions, which are currently at various stages of testing and deployment. 

 

The four solutions are: a manned facade inspection drone launched in 2022 an autonomous facade washing drone launched in June 2024 an autonomous facade painting drone with an estimated deployment ready date in 1HFY2026 and an autonomous indoor painting robot, with an estimated deployment ready date in 1HFY2026. 

 

Higher dividend hints at positive outlook

 

ISOTeam ceased dividend payments during the pandemic years of FY2020-FY2023. Following that, the company committed to a dividend payout ratio of not less than 25% for FY2024 and not less than 30% for FY2025 onwards. 

 

&ldquo We believe this reflects the management&rsquo s confidence in its business outlook and ability to sustain a higher dividend payout policy,&rdquo says Ong and Lim. &ldquo We forecast FY2025 dividend per share (DPS) of 0.28 cents, 251% higher than the 0.08 cents announced for FY2024 and expect to see FY2026/FY2027 DPS grow 31%/23% y-o-y, bringing FY2027 DPS to FY2019 levels.&rdquo

 

Ong and Lim see &ldquo more room&rdquo for ISOTeam to raise its dividend policy in the mid-term, given their forecast of positive core earnings per share (EPS) growth over FY2025-FY2027 and its strengthening net debt position.