ISDN Holdings (ISDN SP) - UOB Kay Hian 2017-11-15: 3Q17 Results In-line, China Demand Continues To Fuel Growth

ISDN Holdings (ISDN SP) - UOB Kay Hian 2017-11-15: 3Q17 Results In-line, China Demand Continues To Fuel Growth ISDN HOLDINGS LIMITED I07.SI

ISDN Holdings (ISDN SP) - 3Q17 Results In-line, China Demand Continues To Fuel Growth

  • ISDN’s 9M17 core profit is in line with our expectation, forming 74% of our full-year forecasts. 3Q17 revenue grew 8.0% yoy and flowed down to gross profit which experienced a 12.2% increase yoy. 
  • Headline revenue growth and gross margin expansion came together to contribute to a 327% yoy increase in PATMI. 
  • Maintain BUY with an unchanged PE-based target price of S$0.35, implying 42.9% upside.



RESULTS


Decent 3Q17 results. 

  • ISDN Holdings (ISDN) delivered a decent set of 3Q17 results with net profit jumping by 327% yoy to S$3.0m on the back of 8% yoy growth in top-line.
  • Gross margin held steady at 25%. 9M17 net profit of S$7.7m came in within expectation, representing 74% of our full-year estimate.

Strong demand for motion control and higher orders from existing and new customers. 

  • Management attributed the robust revenue growth to stronger demand from factory automation and a growing customer base which drove motion control and other specialised solutions revenues. 
  • Thanks to the company's high operating leverage by keeping operating costs in checks, 8% growth in revenue translated to a 300+% jump in earnings in 3Q17.


STOCK IMPACT


Robust growth in motions control and integrated engineering solutions. 

  • According to Frost & Sullivan, growth for motion control and the general integrated engineering solutions segments in China is expected to be healthy (2015-20 CAGR of 7.9% and 7.6% respectively). 
  • The company’s early move into the Chinese market was well-timed and ISDN continues to reap the benefits of steady headline growth. We expect ISDN to grow a clip faster than the markets it operates in and to see a growing cash hoard.

Reiterating diversification of earnings and growth. 

  • Management emphasised continued efforts to explore opportunities in renewable energy sectors through strategic partnerships and other forms of collaboration. Potential moves to diversify may smoothen out earnings in a cyclical sector and allow investors to participate in new areas of growth.
  • However, we think the risks of this move (which include managerial hubris and misplaced management resources) bears repeating.


EARNINGS REVISION/RISK

  • No change to earnings forecasts. Maintain three-year 2016-19 net profit CAGR projection of 44% (21% ex-listing expenses). We maintain our conservative forecast of the hydropower business to contribute zero profit in 2018.
  • Drastic changes in macroeconomic environment


VALUATION/RECOMMENDATION

  • Maintain BUY with an unchanged PE-based target price of S$0.35, implying 42.9% upside. 
  • At 7.4x 2018F PE, ISDN trades at a significant discount to its manufacturing peers.


SHARE PRICE CATALYST

  • Potential involvement in Singapore-Malaysia high speed railway project.
  • More orders arising from China’s One Belt, One Road drive.




Edison Chen UOB Kay Hian | Yeo Hai Wei UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-15
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.350 Same 0.350



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