ISDN Holdings - CGS-CIMB Research 2021-08-16: Industrial Automation Is Here To Stay


ISDN Holdings - Industrial Automation Is Here To Stay

  • ISDN’s 1H21 core net profit was in line with our expectation at 50% of our FY21F net profit forecast.
  • ISDN hopes that two out of its three mini-hydro power plants in Indonesia would be operational by end-2021.
  • We reiterate our ADD call on ISDN given the continuing demand for industrial automation solutions. Our target price rises slightly to S$0.85.

Slight headwinds in 2Q21

  • ISDN (SGX:I07)'s 1H21 revenue was better than expected at 57% of our full-year forecast. 1H21 revenue rose 29.9% y-o-y to S$217.2m. This continued to be mainly driven by its core Industrial Automation (IA) business (97.9% of 1H21 revenue; up 44.5% y-o-y). Despite the 44.5% y-o-y increase in revenue, gross profit margin improved marginally by 0.1% pt to 27.2% in 1H21 for the IA business vs 27.1% in 1H20.
  • ISDN's 1H21 core net profit was in line at 50% of our FY21F forecast. We note that 2Q21 core net profit fell 5.7% y-o-y and grew 0.3% q-o-q. Key drags on 1H21 profit performance were
    1. 27.4%/22.2% y-o-y increases in distribution costs and administrative expenses,
    2. increase in tax rate to 25.6% in 1H21 vs 22.6% in 1H20, and
    3. higher minority interest of S$7.2m vs S$3.3m in 1H20.
  • The increases in distribution cost and administrative expenses were mainly due to higher sales commissions, resumption of business travel in China and the absence of COVID-19 government related support. We think that the higher tax rate is attributable to the higher revenue contribution from China, ISDN’s key market which accounted for 73.9% of 1H21 revenue (1H20:59.9%).
  • ISDN’s China operations are taxed at 25%. We also note that the renewable energy business suffered an operating loss of S$1.8m vs S$0.7m operating profit in 1H20.

Automation demand remains strong

  • ISDN is optimistic on its prospects as it sees businesses worldwide as increasingly reliant on technology and automation to operate in a volatile environment. It believes industrial automation demand will remain strong due to the ageing workforce as well as COVID-19 induced labour mobility/availability issues.
  • In its key China market, the government continues to promote the advancement of industrial automation as a vital part of its long-term economic growth plan.
  • For its renewable energy business, management hopes that two out of its three mini-hydro power plants can be operational by end-2021.

Reiterate ADD on ISDN

William TNG CFA CGS-CIMB Research | 2021-08-16
SGX Stock Analyst Report ADD MAINTAIN ADD 0.85 UP 0.844