Earnings could dip in FY22F
- 1H22 revenue was 8.8% above our S$175.2m forecast and formed 44.5% of our full-year forecast.
- 1H22 net profit was 4.2% below our S$11.6m forecast and formed 42.0% of our full-year forecast.
- With the challenging economic conditions in China, FY22F net profit could drop yoy. We reiterate our Add call with a lowerTP of S$0.61.
1H22 results: net profit 4.2% below expectation
1H22 revenue fell 12.2% yoy to S$190.7m while net profit fell 9.0% yoy to S$11.1m. 1H22 revenue (44.5% of our full-year expectation) was 8.8% above our S$175.2m expectation. 1H22 net profit (42.0% of our full-year expectation) was 4.2% below our S$11.6m forecast. Gross profit margin in 1H22 was 28.4% vs. 26.8% in 1H21 as ISDN managed its product mix in favour of better margin products. The company also tightened its cost control with only a 1.6% yoy increase in distribution costs and a 3.8% yoy increase in administration expenses. No interim dividend was declared.
2H22 outlook: order book recovery but challenging conditions
ISDN’s 1H22 revenue was negatively affected by the mandatory Covid -19 lockdowns in China in 2Q22 which led to disruption in inbound manufacturing components and materials as lockdowns stalled air and ground logistics networks. Disruptions to ISDN’s workflow also occurred as its employees could not meet customers during that period. ISDN guided that these conditions improved significantly in Jun -Jul 22 as the lockdowns were lifted resulting in a recovery in order book. However, the group remains worried about revenue. While the group notes that further Covid-19 restrictions remain a risk factor, ISDN also sees lower visibility on the overall macroeconomic outlook for China which could affect 2H22F revenue performance.
Recommendation: reiterate Add given long-term growth prospects
We reiterate our Add call on ISDN with a lower TP of S$0.61. This is due to our 16.6% cut in FY23F EPS forecast. We cut our FY22-24F EPS forecasts by 13.9-19.4% as we reduce revenue expectations on slowing economic growth. Our TP is based on 10.5x FY22F P/E (1 s.d. above the Jan 17 to Aug 22 forward P/E; previously 10.1x). Potential re-rating catalysts include earlier profit contribution from its hydropower segment (no further updates in 1H22 results release; still making progress towards commerciali sation). Downside risks include a prolonged Covid-19 outbreak, leading to travel restrictions which affect ISDN’s ability to service its customers.
