ISDN Holdings - CGS-CIMB Research 2020-11-05: Growth To Continue Into FY21F


ISDN Holdings - Growth To Continue Into FY21F

  • ISDN's 9M20 net profit (at 80% of our FY20F estimate) was in line with our forecast.
  • 9M20 performance was driven by strong orders in its core industrial automation business.
  • Reiterate ADD on ISDN with a higher S$0.65 Target Price as we raise our P/E target to 12x given its strong results and after rolling over to CY22F.

ISDN's 9M20 net profit in line

  • ISDN (SGX:I07)'s 9M20 revenue at 80% of our full-year expectation was better than expected. 9M20 revenue grew 24.7% y-o-y, driven by strong demand for industrial automation in China and construction revenue for its mini hydropower plants in Indonesia. 3Q20 revenue rose 10.8% q-o-q.
  • ISDN's 9M net profit was in line with our expectation at 80% of our full-year forecast.
  • 9M net profit benefitted from higher sales in its core industrial automation business and prudent cost management.
  • Quarter-on-quarter, ISDN's 3Q20 net profit fell 15.4% due to unrealised foreign exchange losses. Excluding foreign exchange losses, we think net profit expanded q-o-q.
  • ISDN's gross profit margin for 9M20 fell slightly to 25.8% from 26.4% in 9M19 due to the recognition of lower-margin construction revenue for its mini hydropower plants. Excluding construction revenue, the core business generated a gross profit margin of 27.5% in 9M20, which was higher than 9M19’s gross profit margin of 26.6%. Other operating expenses climbed 5.3% y-o-y in 9M20 to S$42.0m due to an increase in sales commission and bonus provisions.
  • As at end-Sep 2020, ISDN’s cash balance was S$50.8m vs. S$31.6m as at end-Sep 2019.

Positive outlook

  • US-China trade tensions and the COVID-19 pandemic are driving a reconfiguration of global supply chains to the benefit of Southeast Asia. Given its presence in Singapore and Vietnam, ISDN has gained from such supply chain diversions.
  • At the same time, ISDN’s established presence in industrial automation in China has given the company an edge given the demand recovery there and China’s continued commitment to increase industrial automation.
  • In Indonesia, ISDN’s construction partners are still waiting for the country’s lockdown to be lifted before they fully resume work.

Reiterate ADD on ISDN; higher target price on rollover

  • We reiterate our ADD rating for ISDN with a higher target price of S$0.65 (previously: S$0.50).
  • We roll over valuations to CY22F and raise our P/E multiple peg to 12.0x given ISDN’s continued strong performance. This is still a 40% discount to ISDN’s peers’ 19.9x CY22 P/E. See peer comparison table in PDF report attached below. Previously, we valued ISDN at CY21F P/E of 10x (c.58% discount to its global peers then).
  • 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 mainstay industrial automation business and profit contribution from its hydropower segment.
  • Downside risks are order delays, cost overruns in its hydropower business and a prolonged COVID-19 outbreak.

William TNG CFA CGS-CIMB Research | 2020-11-05
SGX Stock Analyst Report ADD MAINTAIN ADD 0.648 UP 0.501