ISDN Holdings Limited - NRA Capital Research 2018-02-20: Expect Bumper Dividends On Record FY17 Results

ISDN HOLDINGS LIMITED SGX:I07

ISDN Holdings Limited - Expect Bumper Dividends On Record FY17 Results

For the nine-month period ended 30 September 2017, ISDN reported a 15.8% jump in revenue to S$221.7m which in turn led PATMI to grow from S$2.2m in 9M16 to S$7.7m in 9M17 (+246%). Year-on-year, gross margin had remained flat at around 25%.
As 9M17 PATMI has already exceeded full year FY16 PATMI of S$5.15m, we can expect the group to report stellar results for FY17.

Since mid-2016, China’s manufacturing economy seemed to have recovered. China’s seasonally adjusted manufacturing PMI averaged at 51.35 in the 18 months from July 2016 to December 2017, versus an average of 49.87 from January 2015 to June 2016. In turn, the robust manufacturing environment has translated to more demand for ISDN’s motion control products and solutions.
ISDN’s performance has tracked the improved conditions in China, with average four-quarter revenue hitting a low of S$59.1m in 2Q FY16 before growing to more than S$70m in FY17.
We can expect 4Q FY17 performance to remain strong as China’s PMI has remained high at an average of 51.67 during 4Q17, compared to 51.37 in 2Q17 and 51.83 in 3Q17.

In this update, we revised our FY17 PATMI forecast for ISDN from S$8.6m previously to S$10.1m. Implicitly, we expect full year PATMI growth of 96% over that of FY16. Assuming a pay-out ratio of 20%, we can expect the group to raise dividend by 67% to 0.5 cents per share, in line with the stronger results.
As at 30 September 2017, ISDN had net cash of S$18.4m, or 4.67 cents per share on its balance sheet. Net cash had fallen by S$6.6m from the end of 2016 owing to higher working capital requirements following business volume growth, which we interpret as a positive signal.

Renewable energy is a business that ISDN has been incubating for some time. We expect some positive news from this business in 2018 as its first hydropower plant in Indonesia is expected to be completed this year and we expect the 4.6MW plant to generate close to S$1m of earnings for ISDN in 2018.

In this update, we keep our valuation of ISDN at S$0.32, translating to upside of 45% from its close of S$0.220 on 19 February. At 32 cents, we value ISDN at 12.5x P/E, or 10.7x P/E once we exclude net cash from our valuation.
Our valuation is also close to the expected NTA of ISDN in FY17. We continue to like ISDN for its steady financial performance, prospect of higher dividends and its strong balance sheet.
On balance, we maintain our Overweight rating with a high-average return and low risk classification.

Liu Jinshu NRA Capital Research | http://www.nracapital.com/ 2018-02-20

SGX Stock Analyst Report OVERWEIGHT Maintain OVERWEIGHT 0.32 Same 0.320