ISDN Holdings - CGS-CIMB Research 2021-02-05: Short-Term Positives Priced In

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ISDN HOLDINGS LIMITED (SGX:I07)

ISDN Holdings - Short-Term Positives Priced In

• Our small-cap alpha pick ISDN has reached our target price, based on our current earnings expectations. Downgrade to HOLD.
• Upside earnings risk could come from the mini-hydropower business, which we have not factored into our forecasts.
• On risks, we note possible unrealised foreign exchange losses and uncollectable receivable risks while perusing its FY19 annual report.

Small-cap tech country pick has done well

• In our 9 Dec 2020 strategy report on our 2021 outlook Navigating Singapore - CGS-CIMB Research 2020-12-09: Injection & Hope, we picked ISDN Holdings (SGX:I07) as our small-cap alpha stock pick for the tech manufacturing sector. At time of inclusion in the report, ISDN's share price was S$0.40. Year-to-date, ISDN's share price hit an intra-day high of S$0.82 on 21 Jan 2021 and closed at S$0.71 today.

Short-term positives priced in — Downgrade ISDN to HOLD

• As ISDN's share price has priced in the current strong outlook in its core industrial automation business, we downgrade our call on ISDN to a HOLD (based on an unchanged 12x FY22F EPS) from an ADD previously.
• Last year, ISDN reported its FY19 results on 28 Feb, the last Friday of the month. Based on the similar trend, ISDN could report its FY20 results on 26 Feb 2021.
• See ISDN Share Price; ISDN Target Price; ISDN Analyst Reports; ISDN Dividend History; ISDN Announcements; ISDN Latest News.

Upside risks — What is not priced in?

• What we have not been able to pencil into our forecasts as yet for ISDN are:
  1. potential profit contribution from its mini-hydropower business in Indonesia (but this is currently mitigated by the fact that these plants are not yet operational per the last update),
  2. sum-of-parts valuation when such earnings are visible, and
  3. the impact to ISDN’s valuation if the mini-hydropower business is spun off.

Downside risks

• We note that ISDN's 3Q20 financial performance was affected by unrealised foreign exchange losses, on translation of its service concession receivables relating to the mini-hydropower business. Such unrealised foreign exchange translation losses may again be present in its 4Q20 financials.
• Also, in reviewing ISDN's FY19 annual report, we note that there is US$310,000 (S$420,000 as at 31 Dec 2019) that the group is in negotiation to recover from an investee company from its previous attempt to enter the mining business in Indonesia.
• The annual report also highlighted that in prior years, ISDN provided total funding of US$2.9m (S$3.9m as at 31 Dec 2019) relating to the mining business, which is secured by an unconditional personal guarantee of the shareholder of the investee companies; arbitration is currently ongoing against the investee companies.
• Management believes that these repayment amounts are not credit impaired based on the financial standing of the guarantors.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-02-05

SGX Stock Analyst Report HOLD DOWNGRADE ADD 0.720 SAME 0.720