My Bull Case For ISOTeam (5WF)

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I managed to spot this undervalued gem with the help of a close friend of mine who brought ISOTeam to my attention when it IPOed in July 2013. I didn’t think much of it at that time since there was no public tranche and wasn’t a fan of IPOs as a long term investment.

I’ve learnt from Ben Graham’s Intelligent Investor not to partake in IPOs since it’s mainly a cashing out exercise for the initial shareholders. Furthermore, earnings and valuations tend to be at its peak during IPOs as initial shareholders want to sell the shares as high as possible.

Hence, it may be a more prudent approach to wait for hype to die down and earnings to subsequently disappoint due to one-off IPO expenses and/or earnings slump, before taking a stake in the company. IPOs and subsequent performance of Facebook, Alibaba, Go Pro, and Starburst, are perfect examples.

A year later, I revisited ISOTeam and was surprised by its share price performance, it more than doubled and was rising very consistently. I went home and dove right into researching ISOTeam. I loved what I found and regretted not doing my research on ISOTeam sooner. But hey, hindsight is always 20/20. I spent the next week or so on cool down, so I make sure I don’t buy on impulse/emotions. The next week, I made the rational decision to take up a stake in ISOTeam @ 0.26 per share in November 2014.


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The Business

ISOTeam provides a wide range of building maintenance services, which can be classified under 3 main categories: Repairs & Redecorations (R&R) (54% of revenues), Addition & Alteration (A&A) (22% of revenues), Coating & Painting (C&P) (11%), and Others (13%).  On the surface, ISOTeam’s business looks plain and boring, but these are the kind of businesses that are most often overlooked and tend to present undervalued opportunities. From my research, I found the following positive characteristics about the business and operating environment for ISOTeam as well as potential catalysts that will propel the company’s share price upwards for many years to come.

  1. 20% Market Share in  R&R and A&A ($400-$450m market). Four leading players command c.50% of the two markets. The other three are EAC Giftbuild (15%), BM Building (9%) and Solely (4%), all privately held. Similar to Neo Group‘s situation, the industry is highly fragmented with many players. By leading with only 20% market share, there is definitely room for growth and expansion.
  2. Recurring and Defensive Business with Low Credit Risk. Regulatory requirements state that external building walls to be repainted at intervals of not more than 5 years. This means that as long as ISOTeam continues to do its job well, it will not only secure more contracts but also reengaged as the preferred company for building maintenance. Furthermore, since the majority of ISOTeam’s clients are government bodies, the risk of default is virtually zero (unless the town council is run by opposition).
  3. Government Initiatives bodes well for the company. ISOTeam will be able to benefit from the Home Improvement Programme (HIP), Neighbourhood Renewal Programme (NRP), Hawker Upgrading Programme (HUP), and the green initiatives to promote recourse-efficient buildings. Furthermore, the increasing supply and rapid aging of housing provides much growth opportunities for the company.
  4. Exclusive paint applicator for Nippon and SKK Paint in HDB and town council sector.
  5. Expansion into Myanmar and Indonesia. ISOTeam intends to tap its long-time partners, Nippon Paint and SKK Paint, to break into regional markets. Leveraging its partnership with Nippon Paint, ISOTeam plans to enter Myanmar in early 2016. Myanmar has many construction projects and Nippon Paint expects to clinch USD15m worth of contracts. ISOTeam will be working with Singaporean companies already established in this market, such as Keppel Land and Wo Hup. It is in discussions to finalise contracts with Nippon Paint and plans to start operations in Myanmar by mid-2016. It also plans to enter Indonesia in late 2016.


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The Management

ISOTeam is currently led by its founders: Anthony, David, and Danny (ADD). The founders collectively have a deemed interest of approximately 45% of the company through ADD Investment Holding Pte.Ltd. It may be worth noting that Nippon Paint (Singapore) Company Ptd. Ltd has a 5.56% stake in ISOTeam. Hence, it is in Nippon Paint’s interest to see ISOTeam succeed and grow.

The management came across as candid, competentprudent allocators of capital, and pro-growth. I have noticed that whenever the management announces/mentions something, through SGX, Business Times, The Edge, with regards to the future plans of the company, it has always delivered. For example, a year before the handyman portal was officially launched, Mr. Koh had already shared about it. Likewise, in late 2014, Mr. Koh mentioned he was looking for M&As to grow. A few months later, the company acquired 4 complimentary businesses. Now that the management has alluded to its overseas growth plans, we can be more confident of further progress.

ISOTeam is currently in net cash position. 1/3 of its market cap is in cash (S$0.10 per share). In my opinion, the management has made good use of the cash it has by increasing dividends by 15%,  from S$0.01 (2014) to S$0.015 (2015), and consistently buying back shares at current prices.

Cognisant of the abundance of opportunities both locally and overseas, the management is not resting on their laurels and is constantly seeking ways to grow, both organically and inorganically.


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The Financials

ISOTeam’s financials are pretty solid, which validates the strength and sustainability of its business and the management’s competence in allocating capital, managing costs, while pursing growth. Since 2011, ISOTeam’s revenues, profits, cashflow from operations, and free cashflow has been increasing although rather sporadically.

ROE has consistently been above 15% but has been trending down due to the fact that ISOTeam started from a low base. It is worth monitoring if the company can sustain ROEs above 15% with little to no debt in the subsequent years.

The positive cashflow generation and free cashflow has enabled the management to fund its growth plans while increasing dividends and conducting frequent share buybacks, while maintaining a sizeable net cash position (1/3 of market cap).


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The Valuation

At first glance, it might seem that ISOTeam is overvalued relatively to its SGX-listed peers. However, an article from Next Insight provides an invaluable insight as to how ISOTeam should and should not be valued.

From the article, it states that ISOTeam should not be compared with construction companies since it has none of the characteristics: highly cyclical with poor returns on capital. Ironically, ISOTeam’s business is defensive and recurring in nature, and provides good returns on capital (ISOTeam’s projects have very short cycles, and are almost service in nature). This is further supported by a Business Times article (ISOTeam to add more to its toolkit) on 8 Sept 2014, where Mr. Koh mentioned that: “We are almost 100% immune to the softening in the property market. Although we are construction related, we focus on maintenance and upgrading, not new builds”.

Given the lack of comparative peers and the nature of ISOTeam’s business, the discounted cashflow model would mostly accurately reflect the intrinsic value of the company. Given that FY2015 EPS is S$0.0333, using a discount rate of 10% and terminal growth rate of 2.5% (pegged to long-term inflation):


  • Local and overseas growth plans play out smoothly
  • Earnings growth of 10% over the next 5 years
  • Terminal growth rate of 2.5% thereafter
  • Intrinsic Value: S$0.62


  • Local growth plans play out smoothly, excluding overseas growth plans
  • Earnings growth of 5% over the next 5 years
  • Terminal growth rate of 2.5% thereafter
  • Intrinsic Value: S$0.505


  • Excluding local and overseas growth plans
  • Terminal growth rate of 2.5%
  • Intrinsic Value: S$0.455

Back then, I acquired ISOTeam at approximately 10x P/E. Now, ISOTeam roughly trades at around the same valuation as before. It seems to me that the market has not priced in the overseas expansion plans (Myanmar and Indonesia) at all, and that may very well be the share price catalyst ISOTeam needs.

I see an uncanny resemblance between ISOTeam and Vicom (Went from S$0.50 in 2000 to S$6 in 2014). They both have a defensive and recurring business with strong cashflows. Furthermore, they both have the same kind of price action. I am of the view that ISOTeam has the potential to be the next Vicom. It will be interesting to see how ISOTeam turn from a fast grower to a dividend-play stalwart like Vicom in the coming years.


The Bottomline

  • 20% Market Share in  R&R and A&A ($400-$450m market)
  • Recurring and Defensive Business with Low Credit Risk
  • Government Initiatives bodes well for the company
  • Exclusive paint applicator for Nippon and SKK Paint in HDB and town council sector
  • Successful expansion into Myanmar and Indonesia as a price catalyst
  • Management is candid, competent, prudent allocators of capital, and pro-growth
  • Net cash position, increasing dividends, consistently buy back shares
  • Increasing revenues, profits, cashflow from operations, and free cash flow
  • ROE consistently above 15% with little debt
  • Virtually immune to the softening property market.
  • Potentially worth S$0.455-0.62 currently

The Risks

  • Contract-based business: Revenues and earnings will inevitably be sporadic.
  • Concentration risk: 90% of ISOTeam’s revenues are from HDB Town Councils.
  • Sub-contracting risk: ISOTeam subcontracts 75-80% of its R&R jobs. This leads to executions risks and makes it hard for ISOTeam to control quality of its services.
  • Failure to expand into overseas markets.
  • Liquidity risk: ISOTeam’s shares are thinly traded. But it shouldn’t be much of a concern to long-term investors.


Kenny Chia

Value-Growth Investor

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