ISDN HOLDINGS LIMITED (SGX:I07)
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
- 27.4%/22.2% y-o-y increases in distribution costs and administrative expenses,
- increase in tax rate to 25.6% in 1H21 vs 22.6% in 1H20, and
- 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
- We make slight changes to our FY21-23 EPS forecasts for ISDN to reflect revenue mix changes, normalisation of operating expenses, higher tax rates and minority interests.
- At 12.6x Singapore tech sector’s current CY22 average P/E (previously 12.5x), our target price for ISDN is raised slightly to S$0.85 (previously S$0.844).
- See
- Potential re-rating catalyst is earlier profit contribution from its hydropower segment.
- Downside risk is the prolonged COVID-19 utbreak.
William TNG CFA
CGS-CIMB Research
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https://www.cgs-cimb.com
2021-08-16
SGX Stock
Analyst Report
0.85
UP
0.844
