CGS-CIMB has downgraded its call on ISDN to “hold” from “add” as it expects the engineering services provider’s revenue and profit for the third quarter ended Sep 30 to decline from last year. ISDN : I07 0% is expected to release its Q3 FY2022 results by Nov 15.

The research house on Thursday (Nov 10) lowered its target price for ISDN to S$0.39 from S$0.61, based on a lower FY2023 price-to-equity (PE) multiple of 8.6 times, which is the five-year average PE between FY2018 and FY2022. It previously valued ISDN based on a PE multiple of 10.5 times, or one standard deviation above the five-year average.

Revenue for the quarter was estimated to be S$91.2 million, down 14.5 per cent from a year ago. CGS-CIMB said Covid-19 lockdowns in China are set to negatively affect the company’s revenue, as supply chain disruptions persist.

China accounted for about 70 per cent of ISDN’s revenue in FY2021.

CGS-CIMB also estimated ISDN’s profit for the quarter to be about S$3 million, down 65.1 per cent year on year. Earnings per share for FY2022 were forecast to decline by 13.5 per cent to S$0.042.

The research house said it expects ISDN’s foreign exchange losses to rise, with the yuan weakening against the US dollar and Singapore dollar. Besides its business in China, ISDN is also likely to face unrealised foreign exchange losses on receivables for its hydropower projects in Indonesia.

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The analysts noted that ISDN did not commit to any financial instruments to hedge its exposure to foreign currency risk in H1 FY2022.

Such financial instruments include forward exchange contracts, which lock in specific amounts, rates and dates for a currency exchange. Currency options, which allow companies to buy or sell a currency at a fixed rate within a given timeframe, are another such instrument.

In the future, CGS-CIMB said ISDN’s outlook will “remain challenging”, with manufacturers either exiting or reducing their presence in China.

As at 10.15 am on Thursday, shares of ISDN were trading 1.3 per cent or S$0.005 lower at S$0.38.