ISDN Holdings Limited - NRA Capital Research 2017-01-10: Trading Commences On 12 Jan 2017 In Hong Kong

ISDN HOLDINGS LIMITED SGX: I07

ISDN Holdings Limited - Trading Commences On 12 Jan 2017 In Hong Kong

ISDN will be placing out 40m new shares at an issue price of HKD1.25 (about S$0.23) per share for its listing in Hong Kong. The results of the allocation will be announced on 11 January and trading commences 12 January.
Given that ISDN’s share price has risen to S$0.270 as of market close today, the market seems to be pricing in a strong take-up rate for the new shares. If true, ISDN’s first day share price performance in Hong Kong should also be positive.

The new shares will yield ISDN net proceeds of about HKD39.9m (or S$7.38m) after deducting HKD10.1m of fees.
As of 30 September, ISDN has net cash of about S$21.0m or 5.92 cents of net cash per share. Adding in the net proceeds, net cash will rise to S$28.4m or 7.19 cents per share based on an enlarged share capital of 394.7m shares.

90% of the net proceeds or HKD35.9m (S$6.6m) will be applied to repay loans with a weighted average interest of 4.2%, representing an estimated S$0.28m in annual interest costs. ISDN’s annual financing costs is about S$0.72m, based on its reported costs in 9M16. The resultant interest savings will actually reduce earnings dilution in spite of the new shares issued.
In reality, the borrowings will be progressively repaid over a period of six months. Nonetheless, our revised EPS estimate for FY17 is only reduced by 5% from 1.9 to 1.8 cents per share in spite of the 11.3% increase in share capital.

At S$0.270 and excluding net cash of 7.19 cents, ISDN actually trades at 20x FY16 EPS even after factoring in the full interest savings. However, its P/E multiple will drop to 11.3x once we reference its share price as a multiple of FY17 estimated EPS of 1.8 cents. Therefore, longer term upside for ISDN will depend on its ability to deliver on its earnings for FY17.
For FY16, we expect PATMI to be about S$3.6m, translating to 4Q16 earnings of S$1.4m. In 3Q16, ISDN made S$0.7m PATMI. Our 4Q16 estimate is based on the assumption of absence of S$0.6m of foreign exchange loss which ISDN incurred in 3Q16.

We continue to like ISDN for its strong balance sheet and motion control business. Due to the recent strong run-up in its share price, we reclassify it to average return / moderate risk.
The IPO expenses amounted to HKD10.1m or S$1.87m. That said, we have factored in S$1.6m higher administrative expenses in FY17 to partially factor in these expenses. In this update, we leave our valuation unchanged at S$0.300, pending revision when the company releases its full year results.

Liu Jinshu NRA Capital Research | http://www.nracapital.com/ 2017-01-10

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