ISDN Holdings - CGS-CIMB Research 2020-08-21: Positive On 2H20

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ISDN HOLDINGS LIMITED (SGX:I07)

ISDN Holdings - Positive On 2H20

• ISDN held its 1H20 earnings call on 19 Aug 2020.
• 2H20 outlook could be more positive than 1H20 though COVID-19 is a risk.
• Reiterate ADD on ISDN.
• Upside earnings risk from COVID-19 related products in 2H20.

Positive on 2H20

• We listened in to ISDN (SGX:I07)’s 1H20 results call on 19 Aug 2020. Our take is that management is generally positive on 2H20 outlook as the core motion control business continues to see strong demand as companies accelerate automation efforts given the COVID-19 pandemic, relocation of production lines out of China and also China’s increased spending to develop its own semiconductor supply chain.
• ISDN is also splitting its operations into five key segments to sharpen its competitive focus.

Positioning for Industry 4.0

• ISDN started in the 1990s as a parts distributor. Today, the group has grown to be able to offer broad Industry 4.0 solutions and components. ISDN has 913 employees, of which 40% or about 365 are engineers.
• ISDN has more than 10,000 customers and it has 49 sales offices in China and 65 sales offices across Asia. The company’s business in China rebounded strongly in 2Q20 and there was a broad-based increase in demand for its core motion controls solutions in Singapore, Malaysia and Vietnam.

COVID-19 opportunities

• On 6 May 2020, ISDN entered into a joint venture with ERST Project GmbH to deploy disinfectant solutions and coating technology in Asia. Currently, ISDN has signed on dormitory operator Centurion Corp (SGX:OU8) as well as public transport companies and some education companies as customers. ISDN has a 51% stake in the joint venture. We expect some contribution from this joint venture in 2H20 but have yet to model this into our numbers.

Renewable energy – possibly begin in 2021

• Two of ISDN’s three mini-hydropower plants have essentially been completed by 1H20. Given the travel restrictions due to COVID-19, we expect the two completed power plants to be switched on only in FY21. The third plant may be completed by end 1Q21 or 1H21 depending on the COVID-19 situation.
• We believe that the mini-hydropower plants could see meaningful profit contributions once they are operational and have stabilised. We have yet to factor such earnings contributions into our forecasts.

Reiterate ADD

• Reiterate ADD on ISDN. Our Target Price is based on CY21F P/E of 10x (c.58% discount to its global peers).
• See ISDN Share Price; ISDN Target Price; ISDN Analyst Reports; ISDN Dividend History; ISDN Announcements; ISDN Latest News.
• Potential re-rating catalysts for ISDN could come from stronger-than-expected sales orders for its core motion control business.
• Downside risks are order delays and cost overruns in its hydropower business.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-21

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