ISDN Holdings (ISDN SP) - UOB Kay Hian 2018-02-20: 4Q17 Results Preview ~ To Be Positively In Line With Expectations

ISDN Holdings (ISDN SP) - UOB Kay Hian 2018-02-20: 4Q17 Results Preview To Be Positively In Line With Expectations ISDN HOLDINGS LIMITED I07.SI

ISDN Holdings (ISDN SP) - 4Q17 Results Preview To Be Positively In Line With Expectations

  • We expect ISDN’s results to be in line with our expectations as China and its manufacturing sector make a strong showing in 4Q17 (Singapore follows suit). We also note the robust performance of key customers such as AEM and MIT. 
  • ISDN’s venture into renewables is showing progress in R&D through strategic cooperation, but currently has yet to bear fruit, and as such we do not take this into account.
  • Maintain BUY with an unchanged PE-based target price of S$0.35.



WHAT’S NEW


Strong showing by China and its manufacturing sector with Singapore manufacturing equally bullish. 

  • China’s GDP grew at a strong 6.9% in 2017, higher than a previous Reuter’s analyst poll of 6.7%. This topped the official target of 6.5% set by the government. The most recent 4Q GDP y-o-y growth came in at 6.8% (above 6.7% expected in poll). Both China’s official PMI and the Caixin/Markit PMI for Jan 18 was robust at 51.3 and 51.5 respectively, following positive readings of PMI in 4Q17 (readings above 50 indicate expansion). 
  • Singapore’s PMI was equally bullish, with Jan 18 readings at 53.1, the highest since Dec 09, following three months of reading above 52 in 4Q17.

Key customers also performed well. 

  • In line with bullish market readings, ISDN’s key customers also performed well. AEM Holdings announced that it is revising its 2017 pretax operating profit guidance upwards from at least S$32m (+571% y-o-y) to S$35m-37m (up 634-676% y-o-y). (See AEM's announcement dated 22-Jan-2018) 
  • As important contributors of ISDN’s revenue, we believe that this encouraging performance by Foxconn and AEM (and possibly the rest of ISDN’s customers) would result in a stellar set of 2017 results for ISDN.

Venture into the renewables sector is showing progress. 

  • Management previously indicated that they were exploring opportunities in the renewables segment and have recently announced that through their associate, they will be conducting R&D on the usage of blockchain technology for the trading and distribution of solar-generated energy.
  • This could create new business opportunities for ISDN in the management of and investment in high-quality rooftop distributed solar power generation projects as well as power storage solutions.

Blockchain technology is the way forward. 

  • Power and blockchain technology is a very real possibility as Saudi Arabia’s power plant developer/owner ACWA Power is using SolarCoin (a block chain currency rewarded for generating solar power) and Singapore’s SP Group is also exploring blockchain opportunities with power management.


STOCK IMPACT


4Q17 results to play out positively as expected. 

  • Given the rosy macro conditions and strong performance of its key customers, we believe ISDN will perform positively in line with our expectations for 4Q17, thereby bringing 2017 profits to S$11.5m (adding back the one-off costs such as Hong Kong listing expenses). 
  • Going forward, we also view ISDN’s engineering business positively in 2018 and expect them to deliver affirmative results.

Robust growth to continue in motion control and integrated engineering solutions.

  • ISDN’s early move into the Chinese market for motion control and the general integrated engineering solutions segments was well-timed and ISDN continues to reap the benefits with steady headline growth. 
  • We expect ISDN’s business in this segment to grow a clip faster than the markets it operates in and to see its cash hoard grow.

Diversification of investment away from manufacturing has yet to show results.

  • ISDN’s venture into the renewable energy business could potentially help smoothen out earnings in a cyclical sector and allow investors to participate in new areas of growth.
  • However, we think the risks of this (including managerial hubris and misplaced management resources) as well as the possibility of the aptly coined term “di-worseification” bears repeating.


EARNINGS REVISION/RISK

  • No change to earnings forecasts.
  • Profit risk of diversification (including managerial hubris and misplaced management resources).


VALUATION/RECOMMENDATION

  • Maintain BUY with an unchanged PE-based target price of S$0.35, implying 51.9% upside. 
  • At 6.7x 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/ 2018-02-20
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.350 Same 0.350



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