SINGAPORE (June 1): CGS-CIMB’s William Tng has reiterated his “add” call on ISDN Holdings amid strong April performance. Aside from a strong rebound in demand from key markets, the engineering firm has begun production of anti-Covid-19 products to tap into the virus economy.
In a voluntary performance update last Wednesday, ISDN announced a 1Q20 revenue of $79.8 million (which is about 27% of the brokerage’s FY20 estimates) and a net profit of $3.1 million (some 37% FY20F). Revenue grew 5.7% y-o-y despite disruptions to ISDN’s China operations due to extended lockdowns, exceeding Tng’s expectations despite a steep 26.2% y-o-y drop in net profits at the same time.
The strong performance stemmed from a strong rally in ISDN’s performance in April following the reopening of ISDN’s Chinese operations in mid-march, with its 4M20 revenue growing 12.1% y-o-y to $112.2 million and net profit growing 31.4% y-o-y to $6.7 million. ISDN has received $95 million-worth of orders YTD.
“The recovery was [also] due to a broad-based pickup in business in ISDN’s key markets of Singapore, China and Vietnam,” adds Tng, who also noted that 4M20 net profit accounted for 80.4% of his net profit forecast for FY20.
In the medium-term, ISDN is looking to turn the Covid-19 shock into an opportunity for profit. It has partnered with Germany-based ERST Project GmbH to introduce two disinfectant technologies designed to aid the transition to a post-pandemic environment, tapping into greater public demand for virus-free surfaces.
The first product, Waterliq, is a safe, water-based disinfectant capable of deployment through humidifiers in human-safe fine droplets, and is able to kill 99.99% of pathogens; the second, Erstotizer, is a state-of-the-art disinfecting coating that can keep surfaces virus-free for 6- 24 months. ISDN has secured two commercial deployments with public-listed dormitory provider Centurion Corporation and interior design firm First Sight International Pte Ltd.
“Given the lack of detailed financials, we assume gross margin improvement as the primary reason for the better-than-expected 1Q20 performance,” commented Tng, who revised his net profit forecasts upward by 49.2% for 2020, 20.1% 2021 and 11.3% for 2022 respectively. In addition to his “add” call, Tng has increased ISDN’s target price to 27.9 cents from 22 cents, representing a 26.8% upside.
Tng notes that potential re-rating catalysts could stem from stronger-than-expected sales orders for its mainstay motion-control business as well as stronger profits from clean energy. He identifies order delays, cost overruns, US-China trade escalation and a deepened Covid-19 outbreak as potential downsides for ISDN.
As of 11am, ISDN is trading at 24 cents with a price-to-earnings (P/E) ratio of 14.26, with dividend yield standing at 1.7%.
