Here I go again, sharing my 2 cents worth on the earnings call.
Was glad to hear from Keith from Novo Tellus on the call. It's a good showing that he took the time to join in. He did share some of his/Novo Tellus perspective on the investment. Of course we shouldn't just take his comments at face value, but neither should the audience take it too far as to accusing them of certain shenanigans. Some of the queries thrown at him was really aggressive.
My takeaway from the call is that
- Growth remains strong in Q4
- 3Q earnings were impacted by unrealised FX losses, largely from IDR volatility
Referencing William's updated research report
"Quarter-on-quarter, 3Q20 net profit fell 15.4% due to unrealised foreign exchange losses. Excluding foreign exchange losses, we think net profit expanded qoq. "
https://s3-ap-southeast-1.amazonaws.com/...1604627763
When you look at the above it's actually quite an important point being made from his conversation with the company. We know for a fact that 2Q net profit attributable to shareholders is circa $6.4m. 3Q net profit attributable is $5.5m. So that would mean unrealised FX losses would come to > $0.9m.
Lets try to dig through where the unrealised FX losses might come from, which the ISDN team did mention was in relation to the Service Concession Receivables. What I deduce is that those are denominated in IDR.
Service Concession Receivables: $54.5m
SGDIDR 30 Jun: 10,238
SGDIDR 30 Sep: 10,874
If we purely assume that all of the above is in IDR, the fx fluctuations in itself would arrive at revaluation losses of around -$3.18m in Q3 only. We do know that on a blended basis, the share of the hydroplants is about a third, and thus unrealised FX losses attributable to shareholders is about -$1.06m. Adding this back to the 3Q net profit (excluding unrealised FX losses) attributable would arrive at around +$6.5m, which is an expansion quarter on quarter compared to 2Q. Do note that 2Q was a stellar quarter with pent up demand from 1Q. Its highly commendable that the team is able to beat that.
Of course the above is purely conjecture, since the FX workings within the company is highly complex with so many juridictions and functional currencies in the mix (kudos to Christine for her hard work in putting those together!). However with the emphasis on IDR being discussed and its relation to service concession receivables, I do think the guess shouldn't be that far.
My main point though is the following
1) IDR has since recovered halfway to 10,543 at the time of writing, we should see some unrealised FX gains to the tune of $0.5m attributable to shareholders if this maintains
2) the unrealised FX losses is really an unfortunate distraction from the core earnings. Hydroplants are not the core of the business, and these revaluations would only impact the Hydroplants
3) Going forward the company should start to hedge those once the hydroplants kicks off, however on a personal note I would not do it. Hedging IDR is really expensive
So lets recap. 9M YTD net profit is $15.1m. 4Q remains strong with visible orders on the books. If we assume the same core earnings of $6.5m as 3Q and revaluation gains of $0.5m, we would be seeing $15.1m + $6.5m + $0.5m = $22.1m on an estimated FY2020 net profits. I don't know why William is keeping his estimates to $18.73m on a full year basis. Maybe he is factoring in seasonal lulls in December. However I don't really see any seasonal fluctuations from prior year performances.
$170m market cap on $22.1m full year expected profits. 25% dividend payout policy gives it a 3.25% yield, This company is trading at 7.7x PE ratio on FY2020E, 1.04 PB ratio with a burgeoning cash pile. A bargain definitely if you look at the peers that are traded in the industry. $0.395 a share? That's a steal imho. My opinion remains the same. Anything less than 20x PE on FY2020E (the industry average is trading higher than that), we might as well keep this and see through the growth in the next few years. That's at least $1 a share.
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