ISDN Holdings - 3Q22 Net Profit Likely Fell Y-o-y
- We think ISDN (SGX:I07)'s 3Q22F revenue could fall by 14.5% y-o-y/5.0% q-o-q to S$91.19m, due to the ongoing COVID-19 lockdowns in China (China business contributed 70% of ISDN’s FY21 revenue).
- ISDN had its 1H22 revenue negatively affected by the mandatory COVID-19 lockdowns in China in 2Q22, which led to disruptions in inbound manufacturing components and materials as lockdowns stalled air and ground logistics networks.
- Disruptions to ISDN’s workflow also occurred as its employees could not meet customers during that period.
- In addition, we note that the RMB has weakened 5.86% against the US$ and 2.92% against the S$, while the Indonesian rupiah has weakened 2.17% against the US$ in 3Q22. This will likely lead to unrealised foreign exchange losses for ISDN in 3Q22F.
- In 1H20 and FY20, unrealised foreign exchange losses were S$3.7m/S$3.0m. According to ISDN’s 1H22 results commentary, its foreign currency transactions are mainly denominated in RMB and US$, which could subject ISDN to foreign exchange rate risk arising from future commercial transactions and recognised assets and liabilities that are denominated in RMB.
- In 1H22, ISDN did not commit to any financial instruments to hedge its exposure to foreign currency risk. Its service concession receivables (mini-hydropower plants in Indonesia) will also face unrealised foreign exchange losses on translation with the weakening of the Indonesian rupiah against the US$.
- We think ISDN's 3Q22F net profit could fall 65.1% y-o-y/35.4% q-o-q to S$3.0m.
- We believe ISDN's 4Q22F and FY23F outlook will remain challenging as some manufacturing exit China while others reduce their presence there. We reduce our FY22-24F revenue forecasts for ISDN by 3.5-6.0%, leading to 13.5-20.6% reductions in EPS forecasts. We bring down our P/E peg to 8.6x, its 5-year average (FY18-22) on our reduced FY23F EPS forecast. Previously, we used 10.5x P/E (1 standard deviation above the 5-year average P/E).
- Downgrade ISDN to HOLD, pending China easing its zero-COVID policy in FY23F.
- We expect ISDN to issue its 3Q22F business update by 15 Nov 2022. See SGX listed companies' earnings calendar.
Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.
William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2022-11-09 2022-11-09
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