CGS-CIMB Research analyst William Tng has maintained his “add” call on ISDN Holdings even after the company’s revenue and net profit for the 1QFY2022 ended March both stood 10% below his expectations.
On June 10, ISDN reported revenue of $94.7 million for the quarter, down 3.8% y-o-y. The quarter’s earnings, however, increased by 5.8% y-o-y to $6.4 million.
The revenue miss was attributable to the Covid-19 lockdown measures in China. This was offset by better revenue in the other markets ISDN operates in.
ISDN’s gross profit margin remained healthy at 28.7% in 1QFY2022, up 1.6 percentage points y-o-y.
Given the missed revenue expectations for the 1QFY2022 and the spread of the Covid-19 lockdowns in China, Tng has cut his revenue forecasts for the FY2022 by 8.7%.
“We also err on the side of caution and cut FY2023 to FY2024 revenue forecasts by 6.2% to 7.4% given the rising economic uncertainties,” he writes.
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As a result, Tng’s earnings per share (EPS) forecasts for the FY2022 to FY2024 are reduced by 11.0% to 13.4%.
The 11.0% cut in Tng’s estimates for the FY2023 has resulted in a lower target price of 70 cents from 96 cents previously.
The lower target price is also attributable to a revised P/E multiple of 10.1x on ISDN’s FY2023 EPS forecast.
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The revised 10.1x P/E multiple (previously 12.3x) is 1 standard deviation above the forward P/E from January 2017 to May, which is previously above 2 standard deviation, says Tng.
“According to management, ISDN continues to see solid demand for industrial automation across its customer base, resulting in a strong current order book (no disclosure provided). The company hopes that the gradual lifting of Covid-19 restrictions in China will allow its business operations to revert to normalcy,” the analyst writes.
That said, the company remains concerned about the global economic outlook, negative impact from the ongoing Russo-Ukraine war and rising inflation, to which the company is remaining “vigilant” in managing its cost base in the face of such concerns.
In Tng’s view, potential re-rating catalysts include earlier profit contribution from ISDN’s hydropower segment.
“Downside risks include a prolonged Covid-19 outbreak, leading to travel restrictions which could affect ISDN’s ability to service its customers,” he says.
As at 1.08pm, shares in ISDN are trading 0.5 cent lower or 0.95% down at 52 cents.
