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

ISDN HOLDINGS LIMITED (SGX:I07)

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 (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.

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.

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 | https://www.cgs-cimb.com 2020-11-05

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