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
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Yeo Hai Wei
UOB Kay Hian
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http://research.uobkayhian.com/
2017-11-15
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