CGSI raises TP on ISDN Holdings to 40 cents on expected gradual recovery

Notably, the latter business segment saw a stronger 25.5% h-o-h as the industry staged a cautious recovery from the down cycle. 

ISDN’s hydropower business is also up and running, with all three fully-operational hydropower plants generating revenue of $22 million in FY2024, or 233% higher y-o-y.

No thanks to a different product mix, gross margin for the FY2024 declined by 1.2 percentage points (ppts) y-o-y. 

The company plans to pay a full year dividend of 0.47 cents.

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Meanwhile, the group’s management has indicated a cautiously optimistic outlook for the FY2025.

“In management’s view, its core industrial automation business should benefit from China’s strategic priority to address labour shortages and demographic challenges through automation and advanced manufacturing,” writes Tng in his March 10 note.

He adds: “In Southeast Asia, ISDN believes its recent expansion into Malaysia and Taiwan should enable it to capture growth opportunities from the ‘China+1’ reorganisation of the global supply chain as more manufacturing activity shifts to these regions.”

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For the group’s hydropower business, a fourth mini-hydropower plant, Lau Biang 2 has commenced construction in Indonesia, and management is targeting for operations to begin in FY2026.

Tng writes: “Given the better-than-expected FY2024 performance, we think that the gradual revenue recovery will continue in FY2025 to FY2026 and raise our revenue forecasts by 4.7% to 5.7%, leading to a 7.7% to 13.2% increase in our earnings per share (EPS) forecasts.”

With this, the analyst values ISDN at 12.4 times FY2026 price-to-earnings ratio (P/E), one standard deviation (s.d.) above the average P/E of its previous earnings upcycle.

Re-rating catalysts noted by him include higher-than-expected net profit contribution from its hydropower business segment and a faster pace of economic growth as China tries to re-stimulate its economy. 

On the other hand, downside risks include weak customer demand if the global economy continues to slow, and the possibility of bad debts as economic conditions worsen.