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ISDN

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Expanding from Engineering to Energy

 

ISDN was listed on 24 Nov 2005 in Singapore. The acronym stand for International Servo Dynamics Network. The firm was dual listed in SEHK on 12 Jan 2017. 

Main business is design, customise, assembly and supply of motion control systems.

Other segments are:

-  Specialised Engineering like modular components for industrial automation

-  Industrial Computing that support customer hardware & software needs.

It is a niche and high skilled business with relatively stable gross margin.

Industries which the company serve are: Energy, Medical, Semiconductors, Transportation and Telecommunication. Global push towards automation & robotics underpin demand for its engineering services. 

Served markets are: China, Hong Kong, Indonesia, Malaysia, Singapore, Thailand and Vietnam.

Centre of Excellence is located in its own Wujiang Industrial Park, China where many associates and joint ventures are housed. The firm is co-developing PT ISDN Banteang Industrial Complex in Indonesia and will manage the facility. 

On Jan19, company announced J.V. with Interelectric to distribute maxon motor in South East Asia - Singapore, Malaysia, Indonesia, Thailand, Vietnam, Philippines and Hong Kong.

This will position the company to both expand into new markets and to engage companies relocating out of China as a result of trade war. 

Financial FY2018 

Revenue grew 3% to $301M. Gross and operating margins continue to trend up at 26.7% and 6.4% respectively. Net profit grew 15% to $11M while 4Q18 recorded a loss of $1.5M due to receivables impairment of $2.4M and higher expenses.  

Balance sheet is healthy with cash per share of 0.11, current ratio 2.2 and Z-score 2.7.

Dividend and Valuation

Dividend declared is 0.7 cents. Dividend cover 25%. Dividend yield 3.5% at $0.20. 

At @ 0.20, full year P/E is 6.8 with a P/NTA of 0.6. 

Energy

Energy is likely an important earning contributor in the not too distant future. 

Hydropower, Indonesia

The firm is expecting a 4.6MW and 9MW to be operational mid-2019, while a third 10MW plant to be ready in 2020. Another eight hydropower plants are in the pipeline. 

Solar Power, China

Currently operating a 1MW rooftop solar power plant in Wujiang in collaboration with Comtec Solar Systems Group. Its associate C&I Renewable is working with The9 Group to employ blockchain technology as a platform for trading and distribution of solar-related energy. 

Risk

Concerns about US-China trade war have caused broad decline in stock prices and the firm is experiencing similar sentiment.

In late October, a case of potential fraud for $1.9M in a subsidiary was announced. Two weeks later, the company announced an investigation against a former manager. This sent an important zero-tolerance message to the organisation about its policy towards fraud.

Opinion 2019

Two strategic imperatives driving ISDN growth ambition in the years ahead:

1. Developing new Motion Control customers in Asia and engaging manufacturers within and relocating out of China.

2. Expanding mini-hydropower business over the next few years.

Update: 1-May-2019

Weak smartphone and automotive demand have affected quite a few electronics firms in 1Q19. ISDN may face some headwind as well. Narrative from Annual Report 2018 appear to imply hydropower plants operation may be slightly delayed.

Notes on ISDN - Headwind

Trade war between U.S. and China is starting to bite. 

2Q19 revenue declined by 17% and net earning by 73%. 1H-2019 net earning fell by 45%. 

While China industrialisation narrative remains, trade war is presenting significant headwind even as the company expand its focus in South East Asia.

Hydropower now reflected as a portfolio is a step in the right direction. The pace of development however is still relatively slow since announcement in early 2013 about 6-1/2 years ago.