CGS-CIMB Research is downgrading ISDN Holdings as short-term positives are priced in, with the mechatronics engineering company reaching analysts’ target price of 72 cents. 

“In our Dec 9, 2020 strategy report on our 2021 outlook (Navigating Singapore), we picked ISDN Holdings as our small-cap alpha stock pick for the tech manufacturing sector. At time of inclusion in the report, the last-done price was $0.40. Year-to-date, ISDN hit an intraday high price of $0.82 on Jan 21, 2021 and closed at $0.71 today,” writes CGS-CIMB analyst William Tng on Feb 5. 

Tng is downgrading ISDN Holdings to “hold” from “add”, with an unchanged target price of 72 cents. 

“As the share price has priced in the current strong outlook in its core industrial automation business, we downgrade our call on the stock… Last year, ISDN reported its FY2019 results on Feb 28, the last Friday of the month. Based on the similar trend, ISDN could report its FY2020 results on Feb 26, 2021,” notes Tng. 

That said, Tng acknowledges that the forecast has yet to account for potential profit contribution from its mini-hydropower business in Indonesia, though these plants are not yet operational. 


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In addition, Tng notes that present blind spots include the sum-of-parts valuation when such earnings are visible and the impact to ISDN’s valuation if the mini hydropower business is spun off.

The company was incorporated in Singapore in December 2004 under the name of Automation Control Group Pte Ltd. ISDN Holdings assumed its present name in May 2005. 

The mechatronics engineering group provides integrated solutions to its motion control and industrial computing customers; including design, customisation, assembly, installation and after sales support. Its business is divided into three segments: engineering solutions including motion control, the industrial computing division; and other related engineering support services.

Tng also notes that the company’s 3QFY2020 financial performance was affected by unrealised foreign exchange losses, on translation of its service concession receivables relating to the mini-hydropower business. 

“Such unrealised foreign exchange translation losses may again be present in its 4QFY2020 financials. Also, in reviewing its FY2019 annual report, we note that there is US$310,000 ($420,000 as at Dec 31, 2019) that the group is in negotiation to recover from an investee company from its previous attempt to enter the mining business in Indonesia,” notes Tng.


See: ISDN is 'on track' to report record net profit in FY2020F, says CGS-CIMB


 

The annual report also highlighted that in prior years, ISDN provided total funding of US$2.9m ($3.9m as at Dec 31, 2019) relating to the mining business, which is secured by an unconditional personal guarantee of the shareholder of the investee companies; arbitration is currently ongoing against the investee companies. 

Management believes that these repayment amounts are not credit impaired based on the financial standing of the guarantors, writes Tng.

Last December, Tng said he believes that the company is “on track” to deliver a five-year record high revenue and net profit in FY2020F despite the Covid-19 pandemic.

The company’s president and managing director Teo Cher Koon holds a majority stake in the company, with 31.7% of shares. 

As at 11.38am, shares in ISDN are trading 1 cent lower, or 1.40% down, at 70.5 cents.