• ISDN’s 1Q21 revenue/net profit at 26%/25% of our full-year forecast was in line with our expectations.
• The company continues to benefit from the secular transformation from labour-intensive manufacturing to automated manufacturing.
• We reiterate our ADD call with a higher target price of S$0.84 for ISDN, based on Singapore tech sector’s CY22 average P/E of 12.5x.

ISDN's 1Q21 Results in Line

• ISDN (SGX:I07) provided a voluntary update for 1Q21. 1Q21 revenue/net profit at 26%/25% of our full-year forecast was in line with our expectations. 1Q21 revenue rose 23.4% y-o-y while gross profit climbed 52.7% y-o-y.
• Gross profit margin expanded by 5.2% points to 27.0% in 1Q21 from 21.8% in 1Q20 (recall that 1Q20 performance was affected by the onset of COVID-19).
• Operating expenses rose 14.3% y-o-y due to the upgrade of its information technology systems. Other operating expenses fell 91.2% y-o-y.
• Net profit jumped 95.4% y-o-y to S$6.1m. ISDN reported that there was broad revenue growth across its customer portfolio in 1Q21. ISDN continues to benefit from secular trends that it highlighted previously such as
  1. semiconductor super cycle; semiconductor shortages,
  2. accelerating Industry 4.0 adoption, and
  3. accelerated pace of automation to substitute for labour given COVID-19 induced labour issues.
• At end-Mar 21, ISDN had cash and cash equivalents of S$54.6m.

ISDN's Outlook for FY21

• According to Mordor Intelligence, the factory automation and ISDN’s mini-hydropower plant business in Indonesia came to a standstill as the country battled the COVID-19 pandemic. ISDN is working hard to restart work to commission its power plants by Jul 21.

Reiterate ADD With a Higher S$0.84 Target Price

• Given the positive start assumptions for FY22-23F given ISDN’s ability to maintain gross profit margin at 27% in 1Q21. Hence, we lift our ISDN's FY22-23F earnings per share forecasts by 12.5-13.5%. At 12.5x Singapore tech sector’s CY22 average P/E (previously 12x), our target price for ISDN rises to S$0.84.
• Potential re-rating catalysts could come from stronger-than-expected cost overruns in its hydropower business and a prolonged COVID-19 outbreak.

Source: CGS-CIMB Research - 27 Apr 2021