• ISDN’s 2Q19 net profit fell 73% y-o-y and was below our expectations.
• The revenue decline was mainly due to the impact from the trade tensions and the downturn in the semiconductor industry.
• We cut our Target Price to S$0.27 on our lowered earnings forecasts. Maintain ADD.

2Q19 Below Expectations

• ISDN HOLDINGS LIMITED (SGX:I07)'s 1H19 core net profit at 47% of our full year expectation was below its past 4-year historical average of 52%. Revenue fell 17% y-o-y to S$71.4m while net profit fell 73% y-o-y.
• In its core engineering solutions business, gross profit margin improved slightly to 26.2% versus 26.0% in 2Q18. Gross profit margin for this segment was 25.8% in 1H19 versus 25.7% in 1H18.
• ISDN also recognised S$0.7m in construction revenue from its construction of mini-hydropower plants in Indonesia. 2Q19’s poor performance is mainly due to the revenue decline. The balance sheet remains in a net cash position.

Trade War and Semicon Down Cycle

• The revenue decline in 2Q19 was due to headwinds from the global trade tensions as well as the ongoing downturn in the semiconductor industry. The revenue decline would likely have been worse if not for
  1. ISDN’s diversified customer base of 10,000 customers across various industries,
  2. its diversified product mix and
  3. more value-added engineering solutions provided by the group.

Cautious on Short-term

• In the short-term, ISDN sees uncertain market conditions and will adopt a cautious stance. The group is in close contact with its customers and suppliers. Based on 2Q balance sheet numbers, the cash cycle has lengthened by 27 days as trade and other receivables days increased to 138 (2Q18: 119) and inventory days rose to 87 (2Q18:77).
• As at end-Jul, trade and other receivables decreased to S$91.6m as S$16.3m worth of receivables were collected.

Minimal Drag From Non-core Business

• In 2Q19, ISDN recognised S$0.7m in revenue from the construction of its mini-hydropower plants in Indonesia. Gross profit from this business segment was S$51,000 in 2Q19.
• ISDN expects its first two mini-hydropower plants to start production in 2H19 and a third plant to do the same in FY20.

Lower Target Price on Earnings Cuts

• We lower our FY19-21F earnings forecasts as the trade war worsens. Hence, our Target Price is lowered to S$0.27, still based on CY20F P/E of 10x, 31% discount to global peers.
• Potential re-rating catalysts for the stock could come from stronger-than-expected sales orders for its mainstay motion control business and profit contribution from its clean energy segment.
• Key downside risks are order delays, cost overruns in its energy business and further escalation in the trade war affecting our 2H19 forecasts.

Source: CGS-CIMB Research - 16 Aug 2019