CGS-CIMB Research analyst William Tng has maintained his “buy” call and raised his target price on ISDN Holdings slightly to 85 cents from 84.4 cents, due to a positive outlook for the company.
ISDN reported 1HFY2021 revenue rose 29.9% y-o-y to $217.2 million, with Tng calling it “better than expected.”
This continued to be mainly driven by its core Industrial Automation (IA) business, which made up 97.9% of its revenue. But despite the 44.5% y-o-y increase in revenue for the IA segment, gross profit margin only improved marginally by 0.1% to 27.2% in 1HFY2021 for the IA segment vs. 27.1% in 1HFY2020.
Tng notes that key drags on 1H2021 profit performance were increases in distribution costs and administrative expenses, an increase in tax rate to 25.6% in 1HFY2021 vs. 22.6% in 1HFY2020, and higher minority interest of $7.2 million vs. $3.3 million in 1HFY2020.
He then elaborates that 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 1HFY2021 revenue. ISDN’s China operations are taxed at 25%,” Tng highlights.
The company’s renewable energy business also reported an operating loss of $1.8 million, compared to the $0.7 million operating profit in 1HFY2020.
But despite these, Tng writes that ISDN is optimistic about its prospects as it sees businesses worldwide as increasingly reliant on technology and automation to operate in a volatile environment.
ISDN also believes industrial automation demand will remain strong due to the ageing workforce as well as Covid-19 induced labour mobility/availability issues.
This is because 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.
Separately, for its renewable energy business in Indonesia, management hopes that two out of its three mini-hydro power plants can be operational by end-2021.
Tng is of the view that a potential re-rating catalyst is if there is an earlier profit contribution from its hydropower segment but also warns of a downside risk in the prolonged Covid-19 outbreak.
Shares of ISDN closed on Aug 18 at 67 cents, 0.5 cent higher and 0.75% up from its previous close. CGS-CIMB forecasts a FY2021 price to book ratio of 1.7, and a dividend yield of 1.99%
