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Sunday, February 12, 2017

Recent Action - ISO Team

I bought 70,000 shares of ISO Team at a share price of 41 cents for a catalyst play. My previous catalyst play were for Noel Gifts and more recently Spackman and they have done considerably well. I hope this turns out equally good. Still, the risks are always pertinent there.

The valuation based on TTM isn't actually cheap but I've always felt that positive earnings expectations will propel the company to be re-rated upwards, with an even higher valuations. Based on the FY16 TTM, the EPS for the company is at 3.2 cents. Based on the current share price, this means that it is trading at a PER of 12.8x.

In any case, here are my quick observations for the company (since this is a catalyst play, I won't be doing a full case analysis on the company).




1.) As mentioned above, valuation based on TTM isn't exactly compelling. For such a company, a PER of 12.8x would only look cheap if based on reverse DCF, they can sustain a growth of 7-8% for the next 5 years using a WACC of 10%. I think the company is more than capable of doing that looking at the various engine drives they had on hand.

2.) The company made a recent acquisition for Rongshun which guarantees them both order book and pre-tax net margin in excess of 12% (higher than the existing company's net margin). The acquisition is made part cash and part treasury shares, so this is going to be directly accretive to the bottomline.

3.) Net cash per share is increasing, balance sheet is strengthening and FCF is positive. The fact that they only paid out around 20 to 30% payout as dividends means they retained quite a bit for growth. I think we could see more acquisitions to come which will be earnings accretive. The ROIC impact to the cash though will be unknown until a few years the acquisition pans out.

4.) New contract won on the renewable energy installation which is one of the engine drives yet to be fully utilized thus far. It's a good first fortray into winning these contracts for more to come.

5.) The R&R and A&A business on the maintenance and repair are backed by public sector demand hence this seems to be recurring every few years based on government requirement. This would form the baseline support while the company is embarking on growth elsewhere.


Final Thoughts

The only drawback for such catalyst play is that the valuation is not as cheap.

The upcoming earnings result will probably be key on whether forward earnings can compensate for forward PER and that's where I am putting my money on.

With market buoyant as a whole, we might just see some surprises ahead.



4 comments:

  1. I read today that Warren Buffet has been selling Walmart. He has stayed away from Airline and Apple, I'm wondering if their teams starting seeing something we don't. Maybe the technology is changing. Either way, whenever Buffet moves, people follows, hence we've been seeing higher prices in Airline and Apple. I guess, Buffett is the Catalyst. I have no doubt one day you might have the same buying power as Buffet, and serve as the catalyst, and you don't have to wait for a "catalyst" to buy anything. You ARE the catalyst.

    Cheers!

    ReplyDelete
    Replies
    1. Apple .... certainly not.

      http://www.forbes.com/sites/laurengensler/2017/02/14/warren-buffett-berkshire-hathaway-apple-stake/#ce1f3122967d

      Delete
  2. Hi B,

    Have you sold? Price has been sliding since you bought and is now $0.39.
    Somehow, I think it is a mistake to catalyst play this stock.
    This is a good company but I will not trade it. Instead, I set a value and exit at the right price. Good luck to you.

    Regards,
    Gerald
    www.sgwealthbuilder.com

    ReplyDelete
    Replies
    1. Hi Gerald

      Yes, I have sold this a couple days ago.

      It didn't work out and I have moved on from it.

      No issue.

      Delete

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