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What Makes ISDN An Attractive Investment Target For Novo Tellus?

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ISDN Holdings (ISDN), a SGX Mainboard-listed multi-engineering solutions company with a market capitalisation value of $90.7 million recently announced that Novo Tellus Capital Partners (Novo Tellus) has acquired a 6.4-percent stake in the Company, or 26,987,295 new subscription shares priced at $0.20 (net $0.196 or HK$1.14 per subscription share). The net proceeds received by the Company, after deducting all related fees and expenses are expected to be approximately $5.3 million (HK$30.7 million).

Moreover, the investment by Novo Tellus will also entitle them to a new non-executive board seat at ISDN Holdings.

Who is Novo Tellus Capital Partners?

Readers might recall that on 17 February 2019, Singapore’s Catalist-listed DeClout sold its stake worth about 36.3 million shares of Mainboard-listed enterprise hardware supplier, Procurri Corporation to Novo Tellus Capital Partners for $12.0 million which was paid in cash by the buyer. At that time, Procurri was 47.0 percent owned by DeClout.

Shares Investment has also written extensively about Procurri Corporation and its developments when earlier in January and February 2019, two investors, namely a US fund company called New State Capital Partners, and another unnamed party walked away from discussions of a potential material transaction involving Procurri.

Novo Tellus Capital Partners is a local-based Private Equity (PE) fund company. At its helm is the chairman of Mainboard-listed AEM Holdings, Mr. Loke Wai San.  According to Novo Tellus website, the seven-man team focuses on partnering with companies closely to grow customers, products, operational discipline and align market vision.

The latest investment in ISDN is expected to close in April 2019. There were no details shared on the exact fund size.

About ISDN

ISDN is currently not being actively listed in the research radars of many brokerage houses. However, with a market capitalisation of $90.7 million, and a stock price of $0.215 as of 01 March 2019, the stock trades around its price-to-earnings (P/E) multiple of 7.9 times, and a price-to-book (P/B) multiple of 0.6.

In the release of its FY18 earnings results on 26 February 2019, ISDN’s total revenue came in at $302 million, an increase of 3.4 percent from FY17’s $292 million. The total net profit rose 15.4 percent year-on-year (YoY) to $11 million in FY18 from $9.5 million in FY17.

The total cash and cash equivalents balance as of 31 December 2018 stood at $41.9 million, with total bank borrowings of $28.3 million (short-term and long-term borrowings of $16.4 million and $11.8 million respectively). The total net cash from operations (Net CFO) in FY18 came in at $4.9 million as compared to $4.9 million in FY17.

The Company offers a wide range of engineering services including Motion Control, Industrial Computing Solutions and other Engineering Solutions. The Company is also dual-listed on the Hong Kong Stock Exchange (HKEX).

Key Financial Metrics

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
31/12/14 31/12/15 31/12/16 31/12/17 31/12/18
Return of Assets (ROA) (%) 5.1% 5.3% 4.3% 5.8% 5.9%
Return on Capital (ROC) (%) 6.7% 7.1% 6 % 8.3% 8.1%
Return on Equity (ROE) (%) 8.5% 8.8% 7.3% 9.5% 9.9%
Gross Margin (%) 26.4% 27.4% 24.7% 24.8% 26.7%
Net Income Margin (%) 3.2% 3.7% 2% 3.3% 3.6%

Source: Company’s financials, SGX StockFacts

We noticed from the Company’s return percentages, and earnings margins, the trend looks stable across time from FY14 to FY18. The gross margin for FY18 did increase by about 200 basis points (bps) in FY18 to 26.7 percent.

isdn

Source: Company’s financials, SGX StockFacts

On the debt-related measures, total debt-to-total equity (D/E) did rise by around 600 basis points from 9.7 percent in FY17 to 15.7percent in FY18, but the interest coverage ratio as measured by the EBITDA-to-Interest Expense fell to 25.6 times in FY18 from 28.7 times in FY17.

What Novo Tellus Investment Mean To Investors?

Based on the Company’s fundamentals, there appears to be not many alarming or red flag indicators. The Company generated positive net operating cash flows, along with quite healthy gearing levels as measured by the D/E and interest coverage ratios.

Valuation-wise, at around seven to eight times price-earnings multiple, with a relatively low to stable gearing, the ISDN does present stability for investors.

The Company declared a final dividend rate of 0.7 Singapore cents for FY18, up from 0.6 Singapore cents in FY17. The trailing twelve months (TTM) dividend yield is therefore 3.3 percent.

The stock price movements have not moved a lot, with the 52-week High/Low at S$0.225/S$0.191.

The latest investment in ISDN is Novo Tellus’ second public investment announced during just the first two months in 2019. There could be some value to ISDN’s business model that might be attracting Novo Tellus’ attention.

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