ISDN Holdings (ISDN SP) - UOB Kay Hian 2018-05-15: 1Q18 Stellar Results, Above Expectations

ISDN Holdings (ISDN SP) - UOB Kay Hian 2018-05-15: 1q18 Stellar Results, Above Expectations ISDN HOLDINGS LIMITED SGX: I07

ISDN Holdings (ISDN SP) - 1Q18 Stellar Results, Above Expectations

  • ISDN delivered stellar 1Q18 results with attributable core profit of S$5.2m (+302% y-o-y) above our expectations, at 40% of our full-year forecast.
  • Even excluding 1Q17’s S$2.1m one-off expenses, net profit would still have grown 35.1% y-o-y.
  • The outlook is encouraging with rising demand for ISDN’s motion control solutions, supported by generally positive PMI for China and Singapore.
  • We raise 2018-20 net profit estimates by 7-9%. Maintain BUY and raise PE-based target price to S$0.365.



RESULTS

  • 1Q18 results above expectations. ISDN Holdings (ISDN) had a particularly strong showing in 1Q18, outperforming our expectations significantly. Its attributable profit of S$5.2m (+302% y-o-y) made up around 40% of our full-year forecast. This could be attributed to top-line growth of 12.6% y-o-y, increase in other operating income by S$1.2m (S$0.2m disposal gains, S$0.5m commission income and S$0.5m consultancy income) coupled with a general decrease in expenses (including the absence of one-off listing expenses and net forex losses). Excluding 1Q17’s S$1.1m listing expense and S$1.0m forex losses, ISDN would still have reported a 35.1% y-o-y growth in net profit in 1Q18.
  • Growing demand for ISDN’s core motion control systems. Demand for ISDN’s high- tech precision control systems from medical devices manufacturers, as well as growing customer base and higher orders, especially in China which continued to grow, and the adoption of advanced automated process for industrial robots in manufacturing are key factors driving its businesses in Southeast Asia, including Singapore and Vietnam.


STOCK IMPACT

  • April’s PMI generally stable or improving. China’s manufacturing purchasing managers’ index (PMI) was generally stable or improved, whether it is the official PMI (Apr 18: 51.4, Mar 18: 51.5) or Caixin/Markit Manufacturing PMI (Apr 18: 51.1, Mar 18: 51.0), both of which topped economists’ forecasts for a modest slowdown to 51.3 or 50.9 respectively. Singapore’s PMI was similar - the Singapore Institute of Purchasing & Materials Management’s PMI was 52.9 in Apr 18 (Mar 18: 53.0) while IHS Markit’s Nikkei Singapore PMI was up to 55.6 (Mar 18: 53.7).
  • Outlook positive; management looking at strong demand for motion control solutions. Management has a positive outlook for its core motion control and other specialised engineering solutions. They believe that ISDN’s business will continue to be driven by growing demand for high-tech precision control systems from medical devices, semiconductor, transportation, oil & gas and railway industries, as well as the growing customer base and orders in China. This is in line with Frost & Sullivan’s forecast that healthy growth for both motion control and general integrated engineering solutions in China (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 at a clip faster than that of the markets it operates in and build up 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

  • Raise 2018-20 net profit forecasts by 7-9%. In view of ISDN’s better-than-expected 1Q18 performance, we raise our net profit estimates for 2018-20 by 9.3%, 7.8% and 7.3% to S$14.1m, S$16.5m and S$19.2m respectively. Historically, ISDN's growth trajectory was at a clip faster compared to the markets it operates in and we expect this trend to persist into 2020 on the back of supportive government policies and general uptick in automation from factory upgrades.
  • Drastic changes in the macroeconomic environment


VALUATION/RECOMMENDATION

  • Maintain BUY and raise PE-based target price to S$0.365, implying 73.7% upside. At 5.9x 2018F PE, ISDN trades at a significant discount to its manufacturing peers.


SHARE PRICE CATALYST

  • More orders arising from China’s Belt and Road drive.





Edison Chen UOB Kay Hian | Yeo Hai Wei UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-15
SGX Stock Analyst Report BUY Maintain BUY 0.365 Up 0.350



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