Excerpts from CGS-CIMB report

Analyst: William Tng, CFA

Strong performance from core business

■ ISDN’s FY20 revenue was slightly above our/Bloomberg consensus’ expectations at 104.0%/103.4% of full-year forecasts.

ISDN

Share price: 
59 c

Target: 
72 c

■ FY20 net profit was negatively affected by impairment and unrealised foreign exchange losses. Excluding impairment charges, core net profit was in line.

■ We upgrade our call to Add (previously Hold) as ISDN’s core industrial automation business continues to perform. TP remains unchanged at S$0.72.

IA revenue
Focus on core earnings
ISDN’s FY20 revenue grew 24.4% yoy to S$361.9m.

The core Industrial Automation (IA) business (93.1% of FY20 sales) saw yoy revenue growth of 17.7%, driven by accelerated investments in industrial automation arising from the Covid-19 pandemic.

Gross profit margin for the IA business rose 0.9% pt to 27.8% in FY20 (FY19:26.9%).

Net profit for FY20 grew 114.8% yoy to S$15.1m (9M20: S$15.1m).

On a full-year basis, exceptional items included S$4.6m in impairment losses on financial assets (which included impairment loss on funding to investee companies where legal claims are in progress) and a provision of S$1.5m as a prudential measure for legal claims from a litigation against its former general manager.

Excluding these exceptional items, core net profit would have been in line (99.9%) with our FY20 forecast and 14.3% above Bloomberg consensus’ expectations.

In FY20, ISDN also suffered an unrealised foreign exchange loss of S$3.0m (we did not classify this as an exceptional item), without which, core net profit would have been above our forecast.

Macro trends still favourable
ISDN remains positive on the outlook for its core IA business.

According to Mordor Intelligence, China’s Factory Automation and Industrial Controls Market is forecast to grow at a compound annual growth rate of 9.8% over 2019 to 2025F.

ISDN also noted that with the competition between China and the United States, there has been a significant reconfiguration of regional supply chains favouring suppliers based in Southeast Asia.

ISDN believes it will continue to benefit from these trends.

Other than the core IA business, ISDN guided that it remains on track to achieve commercialisation of its mini-hydropower business in 2021F.

The group is also optimistic on the emerging disinfectant business led by its flagship certified Waterliq product which continues to gain commercial traction in addressing the need for ecologically-friendly disinfectants.

Upgrade to Add from Hold
We adjust FY21F-22F forecasts for housekeeping purposes and introduce FY23F forecasts.

williamtng4.14William Tng, CFATarget price remains unchanged at S$0.72, still based on unchanged 12x (50% discount to peer average) FY22F earnings.

Potential re-rating catalysts could come from stronger-than-expected sales orders for its mainstay industrial automation business and profit contribution from its hydropower segment.

Downside risks are order delays, cost overruns in its hydropower business and a prolonged Covid-19 outbreak.


Full report here.