It's a long initiation report on ISDN Holdings published today. The 22-pager by KGI analyst Kenny Tan makes clearer the businesses of ISDN, so investors now have fewer excuses to say they can't fathom the story.  

Excerpts from KGI report

Analyst: Kenny Tan

• We initiate coverage on ISDN with an OUTPERFORM recommendation and a target price of S$0.42. Our TP is based on 14x FY21F EPS.


Share price: 
37 c

42 c

 The industrial robotics industry is expected to grow at~12% CAGR, catalysed by the improvements of robot labour over manual labour. COVID-19 serves as another catalyst for automation, and ISDN should see tailwinds from this.

 Recent production figures indicate a possible rebound in complementary businesses, as well as good production from China. We expect 2020 to be a good year for industrial automation, after a lukewarm 2019.

 ISDN has also announced a profit surprise late July, creating substantial investor attention this week, prior to 1H20 earnings.

Investment thesis: Harder, better, faster, stronger. The industrial robotics industry, while having a fairly muted 2019 performance, is expected to continue growing ~12% annually.

KennyTan"Demand for motion control is fairly ubiquitous across all industrial factories, thus customers come from all kinds of industries, such as automotive, medical, aerospace, semiconductor, textile, oil & gas etc."

-- Kenny Tan (photo),
KGI analyst

While this forecast was made before COVID-19, recent data has reflected that production is largely back on track.

ISDN also stands to benefit from certain industry tailwinds due to its customer profile.

May trough, June rebound. June’s machine tool production figures from Japan Machine Tool Builders’ Association (JMTBA) have rebounded off April and May lows that were not seen since the Global Financial Crisis.

Additionally, industrial robot production in China has also been steadily above 2019’s production figures, despite the earlier lockdown.

Surprise profit alert. On 29 July, ISDN issued an announcement to inform investors that 1H20 results will have a substantial YoY profit beat.

Given that 1H19 was substantially better than 2H19 results, we think continued momentum of the strong 1H20 results into 2H20 will lead to new highs in ISDN’s performance.

Valuation & Action: We valuate using PE methodology, applying a 14x multiple to FY21F earnings, and arrive at a TP of S$0.42.

This represents a 14% upside to Wednesday’s close price of S$0.37, and implies a 1.02x FY21F P/B value.

Our valuations are fairly conservative, given the profit surprise is at least 64% of our estimated FY20F profit.

We see further upside should ISDN be able to replicate 1H20’s performance.

Risks: Continued slow-down of IA industry, extensive delays on hydropower projects, Forex risk.

Full report here

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