ISOTeam is a building maintenance, upgrading and retrofitting company with more than 15 years of experience. The firm’s business can be separated into two segments, repairs and redecoration (R&R), as well as addition and alteration (A&A).
Recurrent And Stable Business
The R&R segment, which mainly involves repainting, redecoration, repairing and replacement works, provides a rather defensive and recurring revenue base as demand is supported by legislation which requires external walls of building to be repainted at least once every five years.
Demand for R&R services is expected to increase in the coming years as more public residential projects are completed to accommodate the growing population in Singapore.
Furthermore, ISOTeam has the exclusive license to apply paint works for SKK and Nippon Paint Singapore in the public sector, which ensures that it captures a sizeable amount of R&R projects.
(In a nutshell, for public housing projects that want to use either Nippon’s or SKK’s paint, ISOTeam is the only candidate.)
Given that most of its R&R projects comes from the public sector, there is also low counterparty credit risks.
On the other hand, the A&A segment, which focuses on structural and infrastructure works, complements the R&R services.
Bolstered by a slew of government initiatives in recent years such as the neighbourhood renewal programme by the Housing Development Board and the hawker upgrade programme by the national environment agency, there has been a healthy demand for the firm’s A&A services.
Plans by the government agencies to construct 10 more hawker centres and expand the network of sheltered link ways will likely drive demand for R&R services as well.
The company proudly posts on its website to have worked on more than 230 projects involving over 2,500 buildings, and I foresee this number to grow relatively quickly going forward.
Green Solutions
ISOTeam has been integrating eco-conscious approaches in its projects since 2010 and in 2012, implemented a Green Procurement Policy to reinforce its support of the use of eco-friendly designs and products in its projects.
The government aims to have 80 percent of all buildings in Singapore to be Green Marked by 2030.
Thus, the early adoption of the use of green products and methodologies gives the group an edge when tendering for projects that are required to meet the Building & Construction Authority’s (BCA) Green Mark Standards.
In addition, ISOTeam has collaborated with different R&D partners over the years to develop and commercialise green products. Some of the products it offers include anti-slip clear coating, thermal plaster and composite timber decking. In my opinion, there is room for the group’s green product segment to grow as people become increasingly environmental conscious.
ISOTeam strives to includes a green focus for its projects.
Limited Growth Potential
Currently, all of ISOTeam’s operations are limited within Singapore.
Even as the demand for R&R and A&A services are likely to increase in the next few years, the limited land space in the country sets a cap for its growth prospect.
The company was listed in 2013 and management has stated that a large portion of the IPO proceeds will be allocated for further expansion plans and possible merger and acquisitions (M&A) opportunities. While possible M&A will contribute to inorganic growth for the firm, no detail has been given till date.
Another possible venue for growth will be to venture overseas. In particular, the A&A segment will likely have a larger market base outside of Singapore. However, the lack of regulations that mandates the need to upkeep buildings’ facades will make the overseas market less attractive as a source of recurring income.
At the same time, I expect the company to face keener competition against domestic firms in the overseas market.
Investment Risks- Rising labour cost coupled with restrictions on foreign labour could translate to higher costs pressure.
- Changes in government budget and legislation that could adversely affect demand for ISOTeam’s services.
- Low barrier to entry as firm’s business does not really require highly skilled labour.
Investment Merits- Defensive, recurrent base in R&R segment
- Status as exclusive applicator of paintwork for Nippon Paint Singapore and SKK for public sector mitigates risk of low barrier to entry.
- Robust order book provides earnings visibility ($73.2 million as of 30 June 2014), additionally; the group is the lowest tenderer for projects worth $39.8 million.
SI Research Takeaway
With a part of its business division protected by local legislation and the government’s efforts to upgrade and improve facilities and amenities in mature estates, the outlook for the group seems fairly positive.
So is it worth your money?
Given the highly defensive and recurring nature of the business, ISOTeam will likely suit investors with less risk appetite, despite the fact that growth albeit present would be quite limited at the moment.
But for your information, I think it is worth my money.
(The author opines that the stock is relatively worth looking at and is open to consider including it in her portfolio when the time is right.)
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