ISDN Holdings (ISDN SP) - UOB Kay Hian 2017-07-26: Outstanding 2Q17 Results Ahead

ISDN HOLDINGS LIMITED I07.SI

ISDN Holdings (ISDN SP) - Outstanding 2Q17 Results Ahead

In its upcoming 2Q17 results announcement, ISDN will likely deliver outstanding results as key customers such as Foxconn and AEM are either reporting a > 80% yoy surge in revenue or a 20% mom jump in sales order.
We believe a rosy outlook lies ahead as PMI in both China and Singapore climbed higher in June. ISDN’s formal 25% dividend payout policy will also give investors greater assurance and clarity.

Re-iterate BUY with an unchanged target price of S$0.35, pending release of results.

Two of ISDN’s top customers are expecting exceptional 2Q17 results ahead. FIH Mobile (better known as Foxconn) is expecting a turnover of US$4.2b-4.5b for 1H17 (+82-84% yoy) while AEM Holdings has announced it received S$182m of sales order as at the end of May 17, an increase of S$30m from 18 Apr 17.
As key contributors of ISDN’s revenue, we believe that this terrific performance by Foxconn and AEM (and possibly the rest of ISDN’s customers) would translate to an outstanding set of 2Q17 results for ISDN.

Expanding for the 11th straight month, China’s official June PMI was 51.7, expanding at the quickest pace in three months, buoyed by strong production and new orders.
Production surged to 54.4, marking a strong 1ppt jump from May. New orders in the month also rose to 53.1 from May's 52.3, with export orders surging by 1.3ppt to 52.0, suggesting external demand picked up.
Singapore’s PMI also saw its 10th month of expansion as it rose to 50.9, exceeding economists’ expectations (Bloomberg poll indicated 50.5 or 50.6).

As discussed previously in our initiation report on 15 Jun 17 “"Made in China 2025" and "Belt and Road" To Power Growth”, we opined that ISDN should offer some form of dividend upside given the size of its net cash balance (2017F: S$25.9m or 29.2% of its market cap of S$88.8m) and increasingly positive prospects.
On 20 Jun 17, ISDN formally announced a 25% dividend payout ratio (2016: 16.4%), which has seen dividends increase from 0.3 S cents/share in 2016 to an expected 0.66 S cents/share in 2017 or a 2017F yield of 2.9%.

Given the rosy outlook and higher dividend policy, the stellar 2Q17 results will likely translate to further unlocking of stock value as investors gain greater confidence in ISDN’s ability to deliver results.

Re-iterate BUY with PE-based target price of S$0.35, implying a 55.5% upside.
At 6.8x 2018F PE and 0.5x 2018F P/B, ISDN trades at a significant discount to its manufacturing peers.
Even conservatively forecasting its hydropower business to contribute zero profits, we can still expect adjusted attributable profits to grow at a 2016-19F CAGR of 21%.

Better-than-expected results More orders arising from China's Belt and Road drive.

Edison Chen UOB Kay Hian | Yeo Hai Wei UOB Kay Hian | http://research.uobkayhian.com/ 2017-07-26

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.350 Same 0.350