ISDN Holdings - RHB Invest 2021-05-05: The Industrial Automation Specialist

ISDN HOLDINGS LIMITED (SGX:I07)

ISDN Holdings - The Industrial Automation Specialist

A resilient and diversified business with more than 10,000 customers across industries and geographic locations.
ISDN has been profitable since listing in 2005, and has tripled its profits in the last five years. Delivered profit growth in 2020 despite COVID-19.
Proxy to expected accelerated growth in industrial automation and adoption of Industry 4.0 in Asia.
Expectations of profit contribution from its mini-hydropower plants in Indonesia over the next two years.
ISDN is trading at a significant P/E discount to its peers.

ISDN (SGX:I07) is an engineering solutions company specialising in integrated precision engineering, and industrial computing solutions. It offers a wide range of engineering services, mainly to customers who are manufacturers and original design manufacturers of products and equipment that have specialised requirements in precision motion controls.
ISDN provides the full spectrum of engineering services from conceptualisation and design & development, to prototyping, production, sales & marketing, and after sales engineering support.
ISDN was listed on the SGX on 24 Nov 2005, and was subsequently listed on the HKEX on 12 Jan 2017.

While the pandemic resulted in ISDN’s China operations being stalled for a good two months, its diversification across industries, geographic locations, and over 10,000 customers, provided the group stability even in the depths of the crisis. No single industry that it serves, accounts for more than one third of its revenue.
ISDN has been profitable since listing in 2005, and has tripled its profits in the last five years. In 2020 – thanks to the tailwinds from increased demand for industrial automation, arising from the pandemic – it managed to report 115% y-o-y growth in net profit.

COVID-19 has not only taken a toll on businesses, but has re-emphasised to business owners, the importance of automation and robotics for supply chain resilience. The pandemic has accelerated digitalisation across many industries, building demand for industrial automation solutions.
According to Mordor Intelligence, the factory automation and industrial controls market is forecasted to grow at a CAGR of 9% to reach US$337bn by 2026. Meticulous Research also expects the global industrial automation market to expand to US$306bn by 2027 from US$164bn in 2020.
Given its dominant position as a provider of niche solutions like motion control, industrial computing, and customised engineering solutions for a wide range of industries, we believe ISDN will continue to benefit greatly from the accelerating trend.

As part of its ongoing diversification efforts, ISDN has forayed into renewable energy – primarily in developing mini-hydropower plants in Indonesia – which it believes will be an ideal source of electricity for remote and rural areas. ISDN recognised construction revenue for the mini-hydropower plants in 2020.
While the mini-hydropower plant business in Indonesia almost came to a standstill amid the pandemic, the group expects to commission the power plants by July. As at end 2020, ISDN had a ~67% stake in the mini-hydropower plant business. In its recent business reorganisation, ISDN created a Renewable Energy vertical, which will enable it to spin off the mini hydropower plants at the right time.

ISDN’s 1Q21 revenue grew +23.4% y-o-y to S$98m on the back of continued market demand for industrial automation throughout Asia. ISDN’s focus on growing productivity together with revenue helped its profit grow faster than revenues. Net profit attributable to shareholders grew +95.4% to S$6m for 1Q2021 compared to S$3m in 1Q2020.

ISDN has been in a net cash position since 2010. In 2020, although its total gearing ratio moved higher to 18.8% from 18% in 2019, it reported a net cash balance of S$24m, implying a net gearing of -14%, thanks to its positive FCF generation.

ISDN is a company run by senior professionals who have a decades of experience in the business. Teo Cher Koon, who is the president, managing director, and controlling shareholder, has more than 30 years of experience in the motion control and industrial computing industries. Its senior sales and technical professionals in the core business segment have been with the group since the 1990s.
Novo Tellus, a private equity fund and ISDN’s second largest shareholder, also has a seat on the board.

With over 30 years of experience in engineering mission-critical automation components and subsystems, ISDN’s core industrial automation business should benefit from the accelerated digitalisation across many industries. A resilient business and capable management team should enable ISDN to deliver strong growth in its core business.
See
Commencement of business operations at its mini-hydropower plants this year, should also boost its earnings profile. With valuations that are below the peer average, ISDN's share price should continue to witness strong re-rating.
Downside risks are delays in order delivery, higher-than-estimated costs at its hydropower business in Indonesia, and a prolonged pandemic.
ISDN (SGX:I07) is one of the Top Singapore Small Cap Companies highlighted in RHB's 20 Jewels 2021 Edition.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2021-05-05

SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998 SAME 99998