ISDN Holdings - CGS-CIMB Research 2020-08-10: COVID-19 Brings Opportunities

ISDN HOLDINGS LIMITED (SGX:I07)

ISDN Holdings - COVID-19 Brings Opportunities

ISDN’s 1H20 revenue/net profit accounted for 56%/77% of our full-year forecasts, above our expectations.
Better-than-expected profit was due to margin expansion in its core IA business, higher recognition of construction revenue and cost reductions.
Reiterate ADD for ISDN with Target Price of S$0.501. We believe ISDN is on track for y-o-y net profit growth in FY20F.

ISDN (SGX:I07)’s 1H20F revenue at 56%/55% of our and Bloomberg consensus full-year forecasts was better-than-expected. There was a S$20.1m uplift in revenue due to the progress of the construction of its mini hydropower plant in Indonesia (we were assuming work stoppage due to COVID-19).
The core industrial automation (IA) business also registered 1.9% y-o-y revenue growth in 1H20. A 1.3% pts gross profit margin expansion (1H20: 27.1%; 1H19: 25.8%) in the IA business (96% of 1H20 gross profit) and cost reductions helped 1H20 net profit outperform our and consensus expectations.
ISDN's 1H20 net profit formed 77%/79% of our and consensus full-year estimates.
No interim dividend was declared. Net cash position as at end Jun-2020 was S$16.2m.

ISDN noted that although COVID-19 has greatly disrupted the global economy, it has also proven a clear catalyst for accelerating digitalisation and the transition to Industry 4.0 automation. The group expects to benefit from this as it delivers a broad and deep set of high-tech precision control systems and remote automation technologies for its customers.
ISDN is also benefitting from increased demand for its core IA solutions in Singapore, Malaysia, and Vietnam as the region is currently benefitting from the reconfiguring of global industrial supply chains.
The hydropower business continues to progress towards commercialisation though risks of delays remain.
ISDN also entered into a joint venture with ERST Project GmbH in May 2020 to offer environmentally-friendly disinfectant solutions to aid in the fight against COVID-19. ISDN has since secured Centurion Corp (SGX:OU8) and The Science Park as customers.
Given that ISDN reported a net profit of S$1.5m for 2H19, we believe the group is on track for both h-o-h and y-o-y profit growth in 2HFY20F and FY20F respectively.

Given the better demand outlook and cost reduction efforts, we raise our revenue assumptions and lower cost estimates, leading to 51-80% EPS increase over FY20-22F. We also assume higher construction revenue but note that this is subject to recognition risk if there are work stoppages.
At an unchanged CY21F P/E of 10x (c.60% discount to its global peers), our target price rises to S$0.501 (S$0.279 previously).
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 IA and profit contribution from its hydropower segment.
Downside risks are order delays, cost overruns in its hydropower business and the COVID-19 outbreak.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-10

SGX Stock Analyst Report ADD MAINTAIN ADD 0.501 UP 0.280