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Re-rating catalyst: hydropower earnings

  • 3Q21 net profit was above expectations at 35% of our full-year forecast.
  • Potential hydropower earnings contribution in FY22F could re-rate the shares. Guidance from management could help improve valuation.
  • Reiterate Add with a higher TP of S$1.00 on rollover.
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3Q21: most profitable quarter in its history

ISDN’s 3Q21 revenue grew 10.2% yoy to S$106.7m while net profit grew 56.8% yoy to S$8.6m, making 3Q21 the most profitable quarter in the company’s history. 9M21 revenue grew 22.7% yoy to S$323.8m while 9M21 net profit grew 37.9% yoy to S$20.8m. 3Q21 revenue/net profit at 25%/35% of our full-year forecast was in line/above our expectations. We note that gross profit margin expanded to 28.6% in 3Q21 versus 27.7% while 9M21 gross profit margin was 27.4% versus 25.8% in 9M20. Although no detailed explanation was provided in the business update, we think that the improvement in gross profit margin could be due to a) tapering off of construction-related revenue (for its mini-hydropower plants in Indonesia), b) incremental increase in revenue from higher margin Industry 4.0 software and cloud solutions, and c) an improved cost structure with the completion of an upgrade to its IT systems and consolidation of corporate functions to improve efficiency. The company reported a cash balance of S$59.8m at end Sep-2021.

Raised FY21-23F forecasts

We raise our FY21-23F gross profit margin expectations by 0.2-0.8% pts assuming that ISDN continues to have leeway for further cost improvements, leading to a 2.3-9.4% increase in our net profit forecasts. Potential downside risks to 4Q21F net profit are a)
possible provisions for bad debts, and b) adjustments for under provisioning of tax expenses.

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FY22F – mini-hydropower business could be upside earnings risk

ISDN reported that two of its three mini-hydropower plants in Indonesia were successfully commissioned in Sep 2021 and have already commenced delivering electricity to the regional power grids. The company expects to be able to start commercial operations for these two plants in the coming months. We believe ISDN’s valuation can be improved when management is able to share the potential net profit impact from this business with investors.

Reiterate Add, higher TP on rollover

Our TP (S$1.00, previously S$0.85) is derived as follows: a) we roll over valuation to FY23F, and b) target P/E (on FY23F EPS) is 12.8x (CY23F sector average P/E multiple). Previously, we valued ISDN at 12.6x P/E multiple which is the CY22F sector average
multiple. Potential re-rating catalyst is earlier profit contribution from its hydropower segment. Downside risk is prolonged Covid-19 outbreak.