Had attended the meeting yesterday and William from CGS CIMB and Kenny from KGI were both on it. Kenny has promptly updated his TP to $0.47 by assuming $14m PATMI in his report as follows
https://s3-ap-southeast-1.amazonaws.com/...1597889844
This is really conservative as they are bogged down by the performances in 2H18 and 2H19. To me, those 2 are not seasonal adjustments. But rather there are particular reasons for the poorer performance. This should not be repeating in 2H2020 under the strong backdrop of a Covid19 induced move towards automation.
As per the results briefing, it was mentioned that
Overview
- Current order book as of 19 Aug is $88m, in the May update, it was mentioned that the order book was $95 in Mid March and that produced a record month in Apr 2020 of $32.4m in revenue
- The Jul figures are out and it is a historical monthly number even outstripping the Apr 2020 revenue
- Combining the orderbook on hand and recognised revenue in Jul, 2H 2020 performance is at minimum $120m. I am personally expecting Aug to be another bumper month comparing orderbook against what was announced in May 2020
- In summary 2H2020 revenue is likely to outstrip 1H2020 imho
Coating/Disinfectant Business
- The Chairman acknowledged that the Disinfectant business is not yet accounted for in the 1H2020 Financial Statements, thus the final FY2020 statement would include the full impact of the business
- The company did not reveal the size of expected revenue in the disinfectant business
- As per the announcement prior, they have secured the business of a public bus operator
- For reference, SBS has 3,512 buses as of Dec 2019
https://www.sbstransit.com.sg/Uploads/In...tement.pdf
- SMRT has about 1,250 buses
https://www.smrt.com.sg/News-Room/Information-Kit
- Depending on which disinfectant service they provide, it could vary on the cost of it. But i suspect it won't be earth shattering earnings. ISDN holds 51% of the JV.
- The sector does carry other coating such as anti mould and anti algae, which the chairman alluded to as having billion dollar industries in Asia
https://www.erstapac.com/
Hydropower
- 2 out of 3 of the mini hydropower projects are 98% complete, pending testing which is delayed by the pandemic
- the construction on the last is 50% done and expected to be completed in 2021 with $9m more of construction revenue to be booked (might not be in 2H2020)
- monetisation of the power plants is possible
Now comes the next part which is my own conjectures. Having discussed the motion control solution business, I am interested in the Hydropower business and their contributions to the bottomline. Please do your own research as much of the input here is from my own further research into the company and shouldn't be taken at face value. Caveat Emptor.
Analysis on Hydropower
As of 1H2020 announcement, there is a total of $54.5m in service concessionary receivables. This is likely to increase by another $9m by virtue of additional construction cost.
As per AR2019, Pg 173
The Group has a 50% interest in Aenergy subgroup, which is primarily involved in developing mini-hydropower plants projects in Indonesia. Aenergy, through its subsidiaries, entered into two long term service concession arrangements with PT PLN (Persero) (the “Grantor”), an Indonesia government-owned corporation to build and operate 2 mini-hydropower plants, namely PLTM Anggoci and PLTM Kandibata 1 (collectively the “Power Plants”) in North Sumatra Province, Indonesia. The construction of the 2 power plants are expected to be completed and available for use in 2020.
Pursuant to the service concession arrangements, the Group has to develop (build, operate and transfer (“BOT”), including designing, planning, engineering, financing and constructing, testing and commissioning of, the Power
Plants. The concession period is 25 years from the commercial operation date. The Group will be responsible for any maintenance services required during the concession period. Under the terms of the agreement, the Group
agreed to distribute and sell all electricity produced by the Power Plants to the Grantor and the Grantor agreed to buy all the electricity generated by the Power Plants at the purchase prices determined in the relevant power
purchase agreements. At the end of the concession period, the Power Plants become the property of the Grantor and the Group will have no further involvement in its operations or maintenance requirements.
It is also mentioned on pg 111
Amortisation is provided on a straight-line basis over the operation phase of the concession periods.
So it looks like there will be $63.5m of concessionary receivables will be amortised at $2.54m a year over the life of the power plants. I assume this is for all 3 plants, not sure why the third was not mentioned. The construction cost seem to measure up to 3 plants according to my research.
Let's look at what the recurring income would look like.
- Going by 7.89 US cents on the 9MW Anggoci plant and 10MW Kandibata plant, and 6.00 US cents on the Sisira plant (Again assuming for all 3 plants),
- and 0.7 US cents cost per kWh (range of 0.5 - 0.7c was announced previously)
The income per year would be estimated at SGD12.9m per year. Netting off against amortization would be $10.46m net income.
Do note that ISDN ownership is Kandibata (24.5%), Anggoci (40%) and Sisira (40%). Net Income attributable to equity owners would come out to be about $3.4m a year. Under the BOT arrangement, and operating the plant to end of concession period will mean $3.4m recurring income for next 25 years.
If the company intends to monetise the plants, at a 6% yield discount (PLN is government owned, and 1Y indonesia sovereign yield is about 3.8% at the moment) would give rise to about $165.4m price tag. Netting off the Service Concession Receivables would be circa net $101.9m. Attributable to equity owner is about $33m. That's what a sale might look like from my perspective.
Conclusion
At the current traded price of $0.375 ($161m market cap), is this expensive, cheap or fairly valued? With the profit catalysts firing on all cylinders, I believe the $0.47 TP would be revised soon by Kenny. During the call, even William was wowed by the Jul performance. He literally said "Wow". So perhaps he would relook at the circa 60% discount on multiples that he had attributed to ISDN versus its competitors. A direct competitor Hiwin was quoted during the call, and from a comparison of Q1 to Q2 performance, ISDN is outperforming (though there is no breakdown into China for Hiwin) relatively on available information.
To me, this company is really cheap. Have vested more while I am writing this.