Brokers’ take: CGS upgrades ISDN to ‘hold’ on demand rebound expectations

CGS International Securities has upgraded its rating on ISDN to “hold” from “reduce”, given a cautiously optimistic outlook for demand recovery in key markets, while lowering its target to factor in a weak full-year performance.

On Monday (Mar 18), analyst William Tng said he foresees improved demand conditions to provide earnings upside for the group over FY2024 to FY2025.

He noted that the engineering solutions provider anticipates demand in the China market and the South-east Asian semiconductor industry to recover in the years ahead.

“Management believes that a slowing cyclical headwind, continued demand for industrial automation in Asia, and the growth of ISDN’s strategic capabilities position the group well to capitalise on cyclical recovery and long-term growth in industrial automation,” he said.

Meanwhile, the brokerage has lowered its target price to S$0.32 from S$0.36 upon cutting FY2024 and FY2025 gross profit margin assumptions by 2 and 2.8 percentage points respectively. The earnings per share forecasts for the two years were also down 32.2 per cent and 35 per cent correspondingly.

This came as ISDN reported a weaker gross profit margin and disappointing earnings on Feb 28, amid a semiconductor industry slowdown.

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Tng noted that the company’s H2 net profit was 94.9 per cent below the brokerage’s S$7.2 million forecast. Its FY2023 net profit of S$5.0 million was also 58.1 per cent below the full-year estimate.

“Excluding foreign exchange loss of S$2.5 million and impairment loss on financial assets of S$1.6 million, net profit would have been S$9.1 million, 23.4 per cent below our full-year forecast,” Tng added.

He rolled over the new target price to be based on FY2025 earnings forecast, valuing the engineering company at its 10-year average price-to-earnings ratio of 11 times.

“Upside risks 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,” said Tng, noting that downside risks include weak demand and bad debts amid worsening economic conditions.

As at 11.46 am on Tuesday, shares of ISDN : I07 0%were trading up 1.7 per cent, or S$0.005, to S$0.30.