ISOTeam – on the verge of a bullish break from a potential double bottom formation!

Previously, I have done a write-up (click HERE) on ISOTeam (“ISO”) after interviewing Anthony, CEO, and Richard, GM, on an exclusive basis in Dec 2018. I bought in at that time and took profit in Jan 2019.

AnthonyKoh1.19CEO Anthony Koh. NextInsight photo.Since Apr, I have been accumulating ISO, as its chart seems to portend a potential upside breakout after a lengthy potential double bottom formation. ISO closed at $0.230 on 21 May 2019.

Let’s take a look at its investment merits and more importantly, its investment risks below.


Investment merits

Potential bullish break from a double bottom formation

Since 2017, ISO has experienced a protracted downturn in its share price. For the past five months, it has been consolidating between $0.191 – 0.225. At the time of doing this write-up, ISO seems to be on the verge of staging a bullish break after a lengthy potential 5-month double bottom formation. Neckline is around $0.225. Since 29 Apr 2019, except for two trading days, volume has been increasing and has been above its 30D average volume, as it approaches the resistance region $0.225. Indicators such as MACD, OBV and RSI are generally strengthening in line with the recent up-move. Amid positively placed directional indicators, ADX has been rising from 8.5 on 12 Feb 2019 to close 35.3 on 21 May 2019, indicative of a trend. Except for 200D SMA and 200D EMA, other short term EMAs (20D,50D,100D) are rising. A sustained upside breakout above $0.225 with volume expansion points to an eventual technical measured target $0.260. Conversely, a sustained breakdown from $0.191 with volume expansion points to an eventual technical measured target $0.157. Based on the current chart development, a bullish upside breakout scenario is more likely. 

Near term supports: $0.215 / 0.205 / 0.195 / 0.191
Near term resistances: $0.225 / 0.240 / 0.250 / 0.275

Chart 1: ISO on the verge of breaking out from a lengthy potential double bottom formation

 Source: InvestingNote 21 May 2019

C&O segment may have interesting development in the next few months

ISO has an interesting business segment called Eco-friendly Solutions. In this segment, ISO has a cockroach and odour removal (“C&O”) product which is undergoing tests with the relevant authorities for use in rubbish chutes. According to an article in Today dated Mar 2017 (click HERE), this is targeted, odourless, environment-friendly and more effective in reducing cockroaches. A beneficial side effect is that it helps to reduce methane level in rubbish chutes (high levels of methane is one of the main causes of rubbish fire). My personal guess -- we are likely to hear updates on this segment in the next few months.

Contract wins remain strong

Since Nov 2018, ISO has been winning contracts at a furious pace with a cumulative amount $94m awarded. It is noteworthy that FY18 and FY17 revenue amounted to $83.8m and $82.9m, respectively. According to ISO's 3QFY19 financial statements, management is optimistic about the overall sentiment and outlook for their business and they will continue to leverage on their strengths to win more contracts.

CY2020 may be interesting years

Calendar year 2020 (note financial year ends in June) may be an interesting year for ISO. 

• Firstly, there may be potential disposal gains, as management plans to unlock value by selling two properties at Kaki Bukit and Serangoon. Such sales may result in an approximate $3m gain.

• Secondly ISO has invested $5m into Sunseap via its Series C preference shares in May 2017. Should Sunseap IPO in 2019 - 2020, ISO may be able to get good returns from its investment.

• Thirdly, as a normal course of business, ISO is on the lookout for earnings-accretive merger and acquisition opportunities.

• Fourthly, ISO’s SG Bike seems to be the only company left with a full licence after OFO’s licence was cancelled by LTA on 22 Apr 2019.

Separately, Mobike indicated in Mar 2019 that it has applied to surrender its bicycle-sharing licence. Thus, SG Bike may be able to perform better in the next few years amid a reduction in competition.


Investment community seems to be finally taking note in ISO

ISO is slowly getting the attention of the investment community and media. For example, The Straits Times has published two articles this month in relation to ISO, either directly or indirectly.

Its turnaround is also catching the attention of RHB, the only rated broker covering ISO. Last week, RHB analyst upgraded ISO to buy and increased his target price from $0.230 to $0.290 (click HERE). He also projects S$2.0m net profit in 4QFY19F. If this materialises, it will be ISO’s fourth consecutive quarter on quarter growth in net profit since 4QFY18!

On 4 May 2019, Sunseap was featured on Straits Times (click HERE) as the builder of one of the world’s first and largest sea water floating solar platform along the Straits of Johor, north of Woodlands Waterfront Park.

It is noteworthy that ISO is the installer for this project (see announcement HERE). On 19 May 2019, ISOTeam was featured in The Straits Times with the tag line “ISOTeam building on its capabilities for greater growth” (click HERE).

Valuations seem attractive on a historical basis

Based on RHB's report, if ISO can report FY19F net profit of around S$5.8m, at its last price of $0.230, it is trading at 11.3x FY19F PE. This compares favourably to its 5-year average PE of around 21.6x.

In addition, on a P/BV ratio, ISO is trading around 1.0x P/BV vis-a-vis its 5-year average of around 1.9x. Thus, valuations look attractive on a historical basis.

Investment risks

Please take a look at my write-up on ISO (click HERE) for the risks. Some of the pertinent risks are

Chart reading is extremely subjective

Chart reading is subjective and is likely to be less accurate for small mid cap stocks, especially those with low volume.

Ultra-illiquid company

Ave 30D volume amounts to 157K shares only. This is not a liquid company where investors can enter or exit quickly. Amid the current volatile market conditions due to ongoing trade tensions, ISO may swing quite a bit if there are sudden sellers.

Results must catch up, which seems to be happening

ernest newphotoIt is encouraging that ISO announced a S$1.7m net profit in its 3QFY19 results last week, amid strong recovery across all segments. It is noteworthy that ISO’s 9MFY19 gross margin has edged up to 14.4%, from 14.0% in 1HFY19. Furthermore, based on Table 1 below, ISO reported its second highest quarterly profit in 3QFY19 since 3QFY17!

This is also the third consecutive quarter-on-quarter growth in net profit since 4QFY18. Thus, results may be finally catching up with contract wins.


-- Ernest Lim (photo)

Notwithstanding its contract wins of approximately $94m over the past six months, which are already more than its FY18 revenue of $83.8m, earnings have to catch up.

It is noteworthy that gross margins have dropped from 17.8% in FY18 to 14.0% in 1HFY19. This reflects a conscious effort by management to reduce their margins for R&R contracts in order to get more contracts.

Other new projects which they are doing in CY2019 such as the $46.5m contract win from a leading integrated resort group and the floating solar platform from Sunseap should yield higher margins.

In view of the above, I have deliberately waited for ISO’s 3QFY19 results before completing this write-up.

Table 1: Second highest quarterly profit since 3QFY17

FY19

FY18

FY17

 

3Q

2Q

1Q

4Q

3Q

2Q

1Q

4Q

3Q

Rev

30.4

45.9

27.3

20.2

14.7

23.8

25.1

21.7

16.5

Gross Profit

4.8

5.3

4.9

2.2

3.2

5.0

4.4

5.0

4.0

NPAT

1.7

1.3

0.8

-2.0

0.5

1.9

1.5

1.4

1.0

Source: Company; Ernest’s personal compilations


The above list of risks is not exhaustive

To keep my write-up concise and due to severe time constraints, the above list of risks is not exhaustive. Readers are advised to refer to the analyst reports HERE; ISO's website HERE; ISO’s latest 3QFY19 financial results (click HERE); and my more detailed write-up (click HERE). You can also refer to ISO’s prospectus for more information on the risks etc. In addition, you can also contact ISO’s investor relation August Consulting if you have any queries regarding the company.

Conclusion

In conclusion, ISO continues to be interesting to me based on its chart (possible upside break from a potential bullish double bottom formation) and its business developments.  Nevertheless, readers must be cognisant of (just to cite a few) illiquidity risk, risks relating to chart reading etc. Let’s see how it goes in the next few months.


Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider leaving their contacts here http://ernest15percent.com/index.php/about-me/

P.S: I have mentioned to my clients to relook into ISO on 7 May 2019 when it was trading around $0.215. This write-up was delayed due to severe time constraints and as I was waiting for ISO’s 3QFY19 results.

Disclaimer

Please refer to the disclaimer HERE


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