ISDN Holdings - CGS-CIMB Research 2020-03-02: 4Q19 Loss Leads To Underperformance

ISDN HOLDINGS LIMITED (SGX:I07)

ISDN Holdings - 4Q19 Loss Leads To Underperformance

ISDN Holdings recorded a net loss of S$0.3m in 4Q19, leading to a FY19 net profit of S$7.0m, which was 25% below our expectations.
Core business gross profit margin was 26.8%. FY19 revenue decline was due to trade tensions, as well as non-renewal of certain accounts.
Our Target Price decreased to S$0.23 on our lowered earnings forecasts. Reiterate ADD.

ISDN Holdings (SGX:I07)'s FY19 core net profit at S$7.0m was 25% below our expectation of S$9.4m. 4Q19 revenue grew 11.5% y-o-y, driven by a growing demand for high-tech precision control systems from medical device manufacturers.
In 4Q19, ISDN also recognised construction revenue of approximately S$1.7m, arising from the construction of mini hydropower plants in Indonesia. The industrial automation segment continued to be the key revenue generator, accounting for approximately 98.3% of the group’s total revenue for FY19.
4Q19 losses were due to higher administrative expenses (+18.3% y-o-y as professional fees rose), higher other operating expenses (+10.3% y-o-y due to foreign exchange loss of S$1.3m) and share of loss of associate of S$0.6m.

In its non-core business, ISDN expects three power plants to commence operations in 2Q20 through 4Q20.
The group has also established a programme of cost efficiencies to guard against the negative impact from the Covid-19 outbreak. In its core business, the outlook remains strong as China continues to advocate and invest in industrial automation to progress its Economic Roadmap.

We lower our FY20-21F earnings forecasts to reflect softening market conditions. Our Target Price is lowered to S$0.23, based on an unchanged 10x P/E (c.47% discount to its global peers) as we roll over to FY21F.
See ISDN Share Price; ISDN Target Price; ISDN Analyst Reports; ISDN Dividend History; ISDN Announcements; ISDN Latest News.
Potential re-rating catalysts for the stock could come from stronger-than-expected sales orders for its mainstay motion-control business and profit contribution from its clean energy segment.
Key downside risks are order delays, cost overruns in its energy business, further escalation in the trade war, and worsening of the Covid-19 outbreak.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-02

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