Sunday, July 27, 2014

GP Batteries – Potential turnaround play

Since my write-up on Gallant Venture in late Apr / early May, I have been looking at several companies. One of the companies which caught my eye was GP Batteries due mainly to the following factors:

1.     It trades at an approximate 0.5x Price to book. NAV / share is 1.506.

2.  GP Industries, a major shareholder of GP Batteries, bought an additional 1.764m shares from 18 Jun to 25 Jul. For the month of July alone, GP Industries has purchased 1.39m shares at an average gross price of $0.742 (excluding brokerage and stamp duty)

3.     GP Batteries reported its 4QFY14 results on 29 May (year end Mar) with a net loss of S$52m vs 16m loss the previous year. Its stock price did not weaken much after the results but quickly rebounded approximately 49% from $0.535 in end May to $0.795 on 25 Jul. This might be an indication that FY15 may be a better year.

Description of GP Batteries

GP Batteries manufactures and sells primary and rechargeable batteries. For more information, please refer to the link http://www.gpbatteries.com.sg/

Likely turnaround play because

GP Batteries may be turning around based on the following observations

a)  Absence of loss making ventures. (See excerpt from GP Batteries 4QFY14 statement below). According to the 4QFY14 financials, GP Batteries indicated that before the impairment provisions against Vectirx and the rechargeable Lithium plant in Taiwan, the Group would have posted a profit before tax of about S$20m;

Excerpt from GP Batteries’ 4QFY14 financials (not able to paste here due to IT issues but please refer to pg 15 of 4QFY14 financials)

b)   Savings from interest expense as a result of reduced loans: Based on my personal observations on the FY14 statements, long term and short term bank loans have reduced from S$190m in FY13 to S$152m in FY14. Thus, there should be some savings from interest expense.

c)   Revenues have been pretty stable but quarterly gross margins in FY14 have been higher on a year on year comparison for four consecutive quarters. Gross margins have been above 22% for the past four quarters in FY14, compared to 20.1% to 21.9% gross margins in FY13.

d)     GP Batteries is likely to book a disposal gain on the disposal of its property at 97 Pioneer Road in 1HFY15. Estimated disposal gain is approximately S$9m.


GP Industries has been buying GP Batteries, latest purchase price $0.795

A most interesting factor on GP Batteries is that GP Industries has been actively purchasing shares of GP Batteries. GP Industries bought an additional 1.764m shares from 18 Jun to 25 Jul such that it has 90.5m shares, or 54.92% in GP Batteries. For the month of July alone, GP Industries has purchased 1.39m shares at an average gross price of $0.742 (excluding brokerage and stamp duty). (See Table 1 below)

Table 1: GP Industries purchase price of GP Batteries for the month of July 2014

Purchase date
Qty
Amt
Price per unit
25-Jul-14
40,000
31,800
0.795
24-Jul-14
50,000
37,250
0.745
23-Jul-14
287,000
213,815
0.745
18-Jul-14
115,000
86,150
0.749
17-Jul-14
516,000
380,782
0.738
11-Jul-14
44,000
32,950
0.749
9-Jul-14
171,000
127,660
0.747
7-Jul-14
51,000
37,485
0.735
4-Jul-14
85,000
62,265
0.733
1-Jul-14
31,000
21,700
0.700




Jul purchases
1,390,000
1,031,857
0.742
Source: SGX, Ernest’s compilations
*Please refer to GP Industries’ SGX announcements for more info

GP Batteries is hosting its AGM on 30 Jul. It is going ex-div on 19 Aug 14. Dividend per share is S$0.01.

Some noteworthy points

1.     Time is required to observe whether

a)     The impairment provisions or “any losses” relating to Vectirx and the rechargeable Lithium plant in Taiwan are once off and will not be repeated in FY15F;

b)     There is any growth in their core business and its effect on its bottom line

2.     Stock is pretty illiquid with average 30D and 100D volumes of around 342 lots and 240 lots respectively.

3.     With reference to Chart 1 below, GP Batteries has appreciated approximately 49% from $0.535 in end May to $0.795 on 25 Jul. RSI is at 75.3 on last Fri. It is a tad overbought but it is noteworthy that GP Batteries’ all time high RSI is around 89.7.

Supports: 0.775 / 0.740-0.755

Resistances: 0.820 – 0.830 / 0.850


Chart 1: GP Batteries has rebounded approximately 49% since end May


Source: CIMB itrade complimentary chart (25 Jul 14)

4.     There is no rated analyst coverage. Even if GP Batteries starts to turnaround in 1QFY15, it may take some time before the Market believes that its turnaround is sustainable. Without analyst coverage to raise the awareness of the stock, it may take even more time.  However, if the turnaround is true and sustainable, investors who understand and believe GP Batteries are likely to purchase GP Batteries with a good margin of safety.

Conclusion: Next few quarters’ results may be the re-rating catalyst

Whether GP Batteries will be a turnaround play depends on its results in the next few quarters. Based on its past year results’ release date, 1QFY15F results should be announced approximately around the week of 11 Aug. If GP Batteries can release respectable results in the next few quarters, it may just be the re-rating catalysts for this company.

The above is just a short introduction on GP Batteries. Please visit the company website  http://www.gpbatteries.com.sg/ and SGX website for more information.



Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Monday, May 19, 2014

ISOTeam – On the verge of chart breakout

ISOTeam has been testing the resistance of $0.400 – 0.405 on six occasions since 20 Jan 2014. There was a spike in RSI and ADX levels as the share price tested $0.400 – 0.405 on 9 & 12 May. RSI went to an all time high of 77.4 on 9 May. For the next four trading days (14 – 19 May), the share price consolidated around $0.380 – 0.405 and closed at $0.385 today (Monday). Due to this consolidation, ADX and RSI have fallen to more comfortable levels. RSI closed at 52.0 today.

Based on Chart 1 below, ISOTeam remains on an uptrend, supported by the rising moving averages and the rising trend line. Based on my personal observation on chart and price movement, it seems to be on the verge of a potential break out. Measured technical target price on a successful breakout (if accompanied with follow through buying and volume expansion) is around $0.450 which also coincided with the 52 week high.

Support: 0.375 – 0.380 / 0.370 / 0.360 – 0.365

Resistance: 0.400-0.405 / 0.415 / 0.430 / 0.440 / 0.450

Chart 1: ISOTeam remains on an uptrend, on the verge of a potential break out


Source: CIMB itrade 19 May 14

Interesting developments in April and May

ISOTeam ended their moratorium in January. In April and May 2014, based on my manual observation, there were two days (namely, 16 Apr and 9 May) where there were married trades. These married trades were significant on two fronts. Firstly, the married trades were mostly done at prices which were higher than the last prevailing price. For example, on 9 May, married trades amounting to about 9m shares changed hands with the bulk of it being done at $0.410 – 0.420. As a result of these transactions on 9 May, Singapore Tong Teik (Private) Limited emerged as a substantial shareholder holding 7.5m ISOTeam shares (cost is $0.420), or 6.4% of ISOTeam. Secondly, the volume of the married trades was significant as the total volume of shares transacted on 16 Apr and 9 May amounted to 6.0m and 10.5m respectively. It was noteworthy that the average 30D and 100D volume for ISOTeam only amounted to 868,000 and 478,000 shares respectively.

Conclusion

Against the backdrop of a (likely) positive chart setup and coupled with the above interesting developments, odds are higher of a chart breakout above its six times tested resistance 0.400 – 0.405. Measured technical target price on a successful breakout (if accompanied with follow through buying and volume expansion) is around $0.450 which also coincided with the 52 week high.



Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Thursday, May 1, 2014

Gallant Venture – Huge land bank @Bintan may be re-rating factor

Gallant Venture is a commercial developer, integrated master planner and manager for industrial parks and resorts in Batam and Bintan. Based on its annual report 2013, it has the backing of key shareholders such as Salim (74.5%) and Sembcorp Industries (12.0%). As of 30 Apr 14 closing price at $0.300, Gallant’s market cap is S$1.45b. Notwithstanding its large market capitalization, there is no analyst coverage.

There are some key factors which cause me to take a closer look at Gallant now.

1.      Huge land bank in Bintan totaling 18,000 hectares

Gallant has significant land bank in Bintan totaling approximately 18,000 hectares. According to Gallant’s company website, the land was acquired at a very attractive rate of $3 psm. With the recent interest coming into undervalued property stocks, Gallant may be worth a closer look.  It recently caught my attention and may catch the market attention too.

Although, I am not a property expert in assessing the worth of their land in Bintan, I would guess that it is likely to worth more than before. Its net asset value per share is approximately around $0.415.

2.      Property development business to gain traction

Gallant started to recognize land sales of S$55.5 million contributing net margin of approximately S$34.7 million in FY13. (FY13 net profit was S$47.5m). According to Gallant, three out of the five new hotels already under construction are scheduled to open in 2014. Another three additional hotels have announced to break ground in 2013. As these new properties come online, Gallant expects incremental revenues from their complementary lines of business, such as utilities, ferries and dormitory rentals.

3.      Automotive sector - full year contribution in FY14

As of Jul 2013, Gallant has increased its stake in PT Indomobil Sukses Internasional Tbk (“IMAS”) to 71.49%. In 2013, IMAS’ revenues exceeded S$2.45 billion and generated after-tax profit of almost S$79 million, contributing S$25.8 million profit to Gallant.

Indonesia’s automotive sector has been on an uptrend over the last five years. Total annual vehicle sales have doubled in the last five years from approximately 600,000 units to approximately 1.2 million units in 2013. On the back of Indonesia’s increasing consumption power, management remains positive on the automotive sector.

4.      Chart – consolidation mode

Based on Chart 1 below, Gallant seems to be in a consolidation mode after reaching eight month high at $0.360 on 19 Feb 2014. Based on my personal observation, there seems to be some accumulation at current levels.

Strong support: $0.290 – 0.300 / 0.280

Resistance: $0.315 / 0.335 / 0.350


Chart 1: Gallant seems to be consolidating around 0.280-0.315


Source: CIMB itrade 30 Apr 14

Risks

1.      May stay undervalued for some time if there is no analyst / media coverage.

It is not new that Gallant’s land bank is (very likely) undervalued in their books. However, what has changed is that they have started to recognize resorts land sales and have secured land sales contracts stretching till 2015. Thus, this seems to be a good step forward to monetize their land bank.

Having said the above, if there is no analyst or media coverage, it may still take time for the market to recognize the initiatives that Gallant is doing.

2.      Land sales - lumpy in nature.

As their land sales are lumpy in nature, quarterly results may not be a good gauge of company performance

In addition to the above, there are likely to be other risks involved. As this is just a short introduction on Gallant, please visit the company website http://www.gallantventure.com/ for more information.



Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Sunday, February 23, 2014

China Sunsine - Small market cap… Yet backed by top tier customers

I have taken a look at China Sunsine (“Sunsine”) around 4Q2012 but decided to give it a miss at that time due to weak operating business conditions. One savvy investor friend of mine recently suggested to me to take another look on Sunsine. Below is my short writeup / introduction on Sunsine.

Description of Sunsine

According to its annual report 2012 (“AR2012”), Sunsine is the largest producer of rubber accelerators in China and, probably, the world. It serves all the global top 10 tyre manufacturers such as Bridgestone, Michelin etc and top local tire companies such as Hangzhou Zhongce, GITI Tire etc. In fact, out of the top 75 tyre manufacturers in the world, about 55% are Sunsine's customers.

Please refer to Sunsine’s website http://www.chinasunsine.com/index.php?option=com_content&task=view&id=17&Itemid=34 for an overview of their products.

Investment merits

Likely turnaround play

With reference to Table 1, Sunsine has been reporting improving results for the past three quarters. In fact, 9MFY13 net profit was RMB59.2m which was 85% higher than the entire FY12 net profit of RMB32.0m. In its latest 3QFY13 press release, Mr Xu Cheng Qiu, Executive Chairman said that they are confident of the Group’s growth and outlook for the next 12 months. This is the strongest statement among the past few quarters.

Table 1: Sunsine’s quarterly results since 1QFY12


3QFY13
2QFY13
1QFY13
4QFY12
3QFY12
2QFY12
1QFY12
Revenue (RMB m)
440.3
426.5
384.0
361.0
368.9
363.3
324.0
Gross Profit
(RMB m)
84.4
79.3
56.0
51.1
62.4
72.7
57.5
Net Profit
(RMB m)
27.1
20.5
11.7
-0.9
5.7
11.2
15.9
Source: Company & Ernest’s compilations

FY14F results may be better due to

Firstly, Sunsine’s 4,000 ton DPG plant (accelerator) at Weifang has started commercial production in Sep 2013. Secondly, Phase 1 of 10,000 ton insoluble sulphur is likely to be completed in end 2013. These should contribute in 2014. Thirdly, any increase in average selling price, or sales volume, or reduction in raw material costs in 2014 is likely to bode well for Sunsine too.

Dividend yield of approximate 4%

Company has been giving dividend per share of $0.01 for the past four consecutive years, even in years with poor performance. Hence it is likely to continue this practice. At Friday’s closing price of $0.255, this represents a dividend yield of around 3.9%. Sunsine expects to report 4QFY13F results on 26 Feb 14.

Decent valuations

Sunsine trades at 0.7x P/BV and annualised 2013F PE of around 7.5x. Net asset value per share is around $0.350.

Investment risks

Illiquidity

With reference to Figure 1 below, the top twenty shareholders have about 83.5% of Sunsine’s outstanding shares. Thus, there is little free float which results in its illiquidity. Average 30D and 100D volume amount to 1.19m shares and 422K shares respectively. This is not a liquid company where investors can enter or exit quickly.

Figure 1: Top twenty shareholders hold about 83.5% of company’s shares


Source: Company’s AR2012

S chip risk

This is a Chinese company helmed by Chinese management hence the usual S chip risk applies.

No analyst coverage

According to Bloomberg, there is currently no rated analyst coverage on this stock. It is reasonable to say that the investment community is not familiar with Sunsine. In addition, its small market capitalization of S$119m precludes some funds from taking a position in them.

Exposed to the vagaries of the automotive industry cycle

As Sunsine’s products are used mainly by the tyre manufacturers, Sunsine is exposed to the vagaries of the automotive industry cycle in China. China auto sales rose 13.9% in 2013 vis-à-vis 4.3% in 2012. According to a China Association of Automobile Manufacturers (“CAAM”) estimate released in January, they expect the auto sales to grow at the same pace in 2014. However, it is noteworthy that car sales in China inched up 6% in January 2014 compared to January 2013.

Margins dependent on raw material cost

Most of its cost of sales came from direct raw material costs, namely Aniline. According to Sunsine’s AR2012, ceteris paribus, every 10% increase in the prices for Aniline would have the effect of decreasing the net profit by RMB24.3m in FY12. As such, raw material costs do play a significant aspect in Sunsine’s profitability.

Other developments

There were two announcements in Dec 2013. Firstly, Sunsine announced on 17 Dec 2013 that they have formed a new subsidiary called Shanxian Sunsine Hotel Management Co., Ltd to make a strategic long term investment in the hospitality sector in Heze City. Management emphasised that they do not intend to manage the Property on their own and will appoint a suitable hotel management company to manage this investment.

Secondly, Sunsine announced on 30 Dec 2013 that they have formed a new subsidiary called Shanxian Guangshun Heating Co., Ltd to set up a centralised heating company (“CHC”) to produce steam for internal usage and to supply to all the companies in the Shanxian Chemical Industrial Zone (“SCIZ”) at market rate (It is noteworthy that users of steam pay the charges upfront before usage). For the electricity which is the by product from steam generation, the State Grid will purchase it from the CHC. Sunsine’s decision to set up the CHC arises because the Local Government has indicated to Shandong Sunsine (Shandong Sunsine accounts of more than 50% of the total consumption by all companies in the SCIZ) that either it sets up and operates the CHC, or provides financial assistance and/or guarantee to any third party which undertakes the operation of the CHC. Thus, after a feasibility study, management believes that it is in the best interest for the company to set up the CHC on their own. Personally, pending more information from the company, this seems to be an interesting cash flow generating investment over the medium term.

Management will provide more details on the above developments in due course. For more details, please view the above announcements on SGX website.

Sunsine’s chart analysis

Sunsine has appreciated about 49% from $0.205 on 23 Dec 2013 to an intraday high of $0.305 on 22 Jan 2014 on the back of an increased in volume. The recent profit taking which saw it drop to a low of $0.225 on 13 Feb 2014 was accompanied with low volume. It closed last Friday at $0.255.

The trend seems to be up as evidenced from the rising moving averages. In addition, the moving averages have made golden crosses in Jan 2014 which further support the uptrend observation.

Supports and resistances are as follows

Supports: $0.245 / 0.235 / 0.225 – 0.230

Resistances: $0.265 / 0.275 – 0.285 / 0.305



Chart 1: Seems to be on an uptrend


Source: CIMB chart as of 21 Feb 2014

Conclusion – This is just an introduction

Sunsine seems to be on the cusp of a recovery based on its results from the preceding three quarters, coupled with decent valuations (NAV / share is $0.350) and dividend yields amounting to around 4%. Nevertheless, this is an S chip which is subject to S chip risk, fluctuations in raw material prices and the vagaries of the automotive industry cycle in China. Readers who are interested should take a look at their website http://www.chinasunsine.com/ and their AR2012 http://infopub.sgx.com/FileOpen/China%20Sunsine%20AR2012.ashx?App=Prospectus&FileID=15126 for more information.

China Sunsine reports 4QFY13F results on 26 Feb. A results briefing will be held on 27 Feb.

P.S: I have sent a short email to clients to summarise the gist of the above writeup a few days ago.


Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Monday, January 20, 2014

ISOTeam – Defensive & recurring business

It had been a while since I last posted a company writeup on my blog (the previous one was Nam Cheong in late Nov 2013). I had been doing some regular informal email writeups to my clients but due to time constraints, I was not able to do a formal writeup and post on my blog. Finally, I managed to set aside some time to do a writeup on this company below.
 
Description of ISOTeam
 
ISOTeam has a 15 year track record in Repair & Redecoration works (“R&R”) and Addition & Alteration works (“A&A). It has undertaken over 200 R&R and A&A projects involving more than 1,500 buildings. See Figure 1 on the description of its business segments below.
 
Figure 1: ISOTeam business model
 
Source: Company Annual Report FY13 (financial year ends in June)
 
What’s so interesting on ISOTeam?
 
1.     Recurring business (i.e. R&R) comprises approx 50% of revenue and gross profit
 
Based on Figure 2 below, ISOTeam’s R&R segment comprises of approx 50% of FY12 & FY13 revenue and gross profit. This is comforting to investors as this segment is recurring in nature. It is also supported by government regulations. Unless the Commissioner of Buildings approves otherwise, the exterior walls of buildings are mandated to be repainted at intervals of not more than five years. This creates recurring demand for ISOTeam’s R&R business segment.
 
Figure 2: ISOTeam’s revenue and gross profit breakdowns

Source: Company FY13 Presentation Slides

Source: Company FY13 Presentation Slides

Source: Company FY13 Presentation Slides

2.     Strong order books amid regular contract wins

During their announcement of their FY13 results, ISOTeam mentioned that its order books as of 14 Aug 2013 stood at S$81.0m to be recognized over the next 24 months. This order book of S$81.0m took into account of their contract wins of S$10.9m which was announced on 14 Aug 2013. It is noteworthy that ISOTeam’s FY13 revenue was around S$48m. Hence this order book of S$81.0m to be recognized over the next 24 months provides some earnings visibility in the next two years. In addition, ISOTeam is the lowest bidder for several projects amounting to S$27.0m.

Subsequent to their FY13 results announcement, ISOTeam announced on 26 Oct 2013 that it has won S$19.0m new contracts. Since their IPO on 12 July 2013, they have announced ten contract wins amounting to S$29.9m.

3.     More growth opportunities ahead

Firstly, there is scope for growth in new markets, new customer networks, new related businesses etc as ISOTeam may embark on potential acquisitions, joint venture and / or strategic alliances. Secondly, ISOTeam plans to diversify into the private sector by establishing a private home renovation arm to provide retrofitting services to customers living in landed properties to cater to the various maintenance and property enhancement needs of these homeowners. For the above plans, based on its prospectus, ISOTeam has set aside S$2.5m of its IPO proceeds and has credit facilities of up to S$17.7m for potential business opportunities.

Thirdly, ISOTeam’s industry continues to be buoyed by government initiatives and regulations. For example, the National Environment Agency planned to construct ten new hawker centers by 2017. The Land Transport Authority aimed to construct 200 km of new sheltered linkways between 2014-2018. Also, land has been set aside to build 700,000 new homes by 2030 to cope with a target 6.9m population by then. Hence, ISOTeam’s industry continues to be underpinned by such government initiatives and regulations.

Fourthly, ISOTeam continues to gain entry in untapped sectors. According to its Annual Report 2013, ISOTeam became SKK’s exclusive applicator for JTC industrial projects, army camps and HDB industrial projects since August 2013. This is likely to open out a new chapter of growth for ISOTeam.

4.     Dividend stock in the making?

ISOTeam has distributed a $0.01 dividend per share for its FY13 equivalent to a dividend payout ratio of approximately 20%. Based on a UOB research report, they estimate that ISOTeam’s FY14F to be around S$6.3m. Assuming that ISOTeam’s dividend payout ratio remains the same, investors are likely to get $0.01 dividend per share which works out to be around 2.6% dividend yield. There may be scope of increasing the dividend payout ratio in the years ahead.

Risks

1.     Moratorium ends in January 2014

According to ISOTeam’s prospectus, the moratorium for ISOTeam’s substantial shareholders, namely, ADD Investment, David Ng, Anthony Koh and Danny Foo ends in January. This means that they are free to dispose a portion of their shares. Their total direct and indirect stake amounts to 79.4m shares or 67.6% of ISOTeam’s total outstanding shares. It is noteworthy that ISOTeam share price is up a whopping 77% since its IPO at $0.220 in July 2013. Potential investors should take note of this aspect especially in view of its illiquidity.

2.     Limited analyst coverage

Only UOB Kayhian covers ISOTeam with a target price of S$0.550. It is reasonable to say that most investors are still unfamiliar with ISOTeam. In addition, its small market capitalization of S$44m precludes some funds from taking a position in them.

3.     Illiquid and small market cap of S$44m

With reference to Figure 3 below, ISOTeam’s annual report 2013, the top twenty shareholders have about 89.6% of ISOTeam’s outstanding shares. Thus, there is little free float outside which results in its illiquidity. Average 30D and 100D volume amounts to 588,000 shares and 842,000 shares respectively. This is not a liquid company where investors can enter or exit quickly.

Figure 3: ISOTeam’s top 20 shareholders as at 23 Sep 2013

Source: Company Annual Report FY13

4.     Presence mainly in Spore - concentration risk

As ISOTeam’s business exposure is solely in Singapore with the bulk of its revenue coming from the government, any adverse changes in the government’s budget or policies on building maintenance and estate upgrading may affect ISOTeam.

ISOTeam chart analysis

Stock has consolidated for 9 trading days before it gapped up on 16 Jan 2014. It closed at $0.390 on last Friday. Supports and resistances are as follows

Supports: $0.365 - 0.375 / 0.345 – 0.355
 
Resistances: $0.395 – 0.400 / 0.410 - 0.415 / 0.440 – 0.450

Based on Chart 1 below, chart seems to be on an uptrend and looks set to break $0.395- 0.400. Key resistances are around 0.410 - 0.415 / 0.440 – 0.450.

Chart 1: Consolidated for 9 trading days before gapping up on 16 Jan 2014


Source: CIMB chart as of 17 Jan 2014

Conclusion – 1HFY14F results, potential contract wins or M&A may be re-rating catalysts

ISOTeam generated an adjusted FY13 net profit (less off the disposal gains of S$4.2m and add back S$1.1m in non recurring IPO expenses) of around S$3.9m. UOB estimates its FY14F net profit to be around S$6.3m. If this materializes, it would be a 62% increase in core profits. At S$6.3m, ISOTeam would be trading at around 7.3x FY14F PE. Any potential M&As or higher than expected contract wins may further boost ISOTeam’s profitability.

Lastly, this is just an introduction to ISOTeam...

For readers who are interested, they should take a look at the company website http://isoteam.com.sg/ In addition, as I am not able to reproduce some figures on my blog, readers who are interested can drop me an email at crclk@yahoo.com.sg so that I can send them my writeup.

This is an abridged version which I had sent to my clients a couple of days ago.

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