CGS International (CGSI) has lowered its target price for ISDN Holdings I07 to 28 cents from 32 cents previously, as it cuts its earnings forecasts on the back of a slower pace of recovery of the company.
Analyst William Tng has reiterated his “hold” call as he awaits better earnings visibility for the group as economic conditions improve for its key China markets.
Tng says that ISDN’s 1HFY2024 revenue grew 2.4% y-o-y to come in below his expectations at 47.5% of the firm’s FY2024 forecast. Its net profit fell 17.4% y-o-y.
On its results, the Industrial Automation (IA) business, which accounts for 97.2% of its 1HFY2024 revenue grew 0.9% y-o-y and 1.6% h-o-h, while its hydropower business which makes up 3% of its 1HFY2024 revenue reported tariff income of $6.5 million.
ISDN’s management shared at its analyst briefing on Aug 23 that its China IA business grew 2.1% y-o-y in 1HFY2024, and believes that this represents a market share for ISDN in China’s IA market which saw a decline in robotic order shipments in 1H2024.
Meanwhile, Tng notes that ISDN’s Southeast Asia IA revenue fell 9.3% y-o-y in 1HFY2024, reflecting a broader cyclical slowdown, amid muted manufacturing and industrial capital expenditure as the region emerges cautiously from a semicon downcycle.
“Management said that 1H2024 was characterised by stabilising demand in cyclical industries, which allowed for some cautious optimism that the industrial downcycle may be ending and headed for a recovery,” says Tng.
The group will be increasing efforts to build its presence in Malaysia and Taiwan to help expand the distribution of the group’s services and products and it believes the prospects for IA in China remain strong.
“IA is, in management’s view, the solution to labour shortages and demographic decline in the country, as efficiency and productivity are boosted by smart manufacturing and advanced technology adoption,” he continues.
See also: DBS downgrades Yanlord Land Group to 'hold', but upgrades TP to 70 cents
Given the 1HFY2024 revenue miss, coupled with the slow pace of recovery, Tng cuts his FY2024-FY2025 revenue forecasts by 4.0%-4.7%, leading to 11.9%-26.9% declines in his earnings per share (EPS) forecasts.
He retains his valuation basis of a 10-year average PE of 11.0x, and given the EPS cut, target price is lowered to 28 cents.
The analyst says that upside risks include higher-than-expected net profit contribution from ISDN’s hydropower business segment and a faster pace of economic growth as China tries to re-stimulate its economy; downside risks include weak customer demand if global economy continues to slow, and the possibility of bad debts as economic conditions worsen.
As at 3.14pm, shares in ISDN are trading flat at 27.5 cents.