ISDN Holdings Limited: Assessing Earnings Sustainability and Valuation Alignment Amid Renewable Energy Expansion

ISDN Holdings Limited (SGX:I07) has seen its stock price outperform broader market trends in recent months, despite a backdrop of declining profitability and mixed analyst outlooks. This divergence raises critical questions: Does the company’s current valuation reflect sustainable earnings growth, or is the market over-optimistic about its 2026 prospects? To answer this, we must dissect its financial fundamentals, including its Return on Equity (ROE), dividend policy, and renewable energy investments, while evaluating whether intrinsic value estimates justify the stock’s price.

A Declining ROE and Earnings Sustainability

ISDN’s ROE has plummeted from 13% in 2020 to 3% as of December 2024, reflecting a long-term erosion of profitability [1]. This decline aligns with weak margins: a net margin of 1% and operating margin of 7% in 2024, far below the 5% three-year average [1]. While the company’s ROE is projected to rise to 2.91% in 2025 and 5.34% by 2026, these figures remain modest and start from a low base [2]. Compounding concerns, earnings have contracted by an average of 23.7% annually over the past five years [1], suggesting a lack of consistent reinvestment returns.

The recent 1H25 results underscore this volatility. Despite a 22% revenue increase to S$212.9 million, net profit fell 66% to S$1.3 million due to S$3.2 million in foreign exchange losses [3]. However, core shareholder profits—excluding forex and non-recurring items—grew 35.1%, hinting at underlying operational resilience [3]. This duality complicates the assessment of earnings sustainability: while short-term headwinds distort results, the business appears to retain some growth momentum.

Valuation Metrics: Undervalued or Mispriced?

ISDN’s valuation appears attractive on paper. A trailing P/E ratio of 28.63 and forward P/E of 27.50 suggest the stock trades at a discount to earnings [4]. The P/B ratio of 0.71 further indicates a potential bargain relative to book value [4]. Intrinsic value estimates from multiple models—ranging from S$0.429 to S$0.549—imply the stock is undervalued by 21–38% compared to its current price of S$0.385 [4]. These metrics, combined with a manageable debt-to-equity ratio of 28.8% and a robust interest coverage ratio of 5.9x [1], paint a picture of a company with solid financial health and upside potential.

Yet, intrinsic value models often rely on assumptions about future cash flows and growth. For ISDN, the key question is whether its renewable energy expansion can drive the earnings recovery implied by these models.

Dividend Policy and Renewable Energy Reinvestment

ISDN’s dividend payout ratio of 34.81% in 2025 [5] suggests a conservative approach to shareholder returns, with the company retaining 65% of earnings for reinvestment. This aligns with its strategic focus on renewable energy, particularly in Indonesia. The acquisition of PT Funda Konstruksi Engineering—a 51% stake for S$2 million—has bolstered ISDN’s hydropower capabilities, with PT Funda’s expertise in 70+ completed projects enhancing its competitive edge [6]. Additionally, ISDN plans to expand its mini-hydropower capacity by 81.3% by 2026, capitalizing on Indonesia’s Electricity Supply Business Plan (RUPTL) 2025–2034, which aims to double renewable energy capacity [6].

These investments are critical to earnings sustainability. If successful, they could offset declining returns in traditional segments and generate higher ROE through scalable, long-term projects. However, the renewable energy sector is capital-intensive and subject to regulatory and execution risks. ISDN’s ability to convert these projects into consistent cash flows will determine whether its valuation is justified.

The 2026 Outlook: Justified Optimism or Over-Optimism?

The market’s optimism hinges on ISDN’s 2026 earnings report. Analysts project ROE to rise to 6.52% by 2027 [2], driven by renewable energy growth and improved forex conditions. However, historical trends caution against over-optimism. The company’s ROCE has also declined from 11% to 8.2% over five years [1], indicating lower returns on capital reinvestment. If renewable energy projects fail to deliver expected returns or face delays, the projected ROE gains may not materialize.

Moreover, the current valuation assumes a rapid normalization of forex losses and a swift transition to profitability in new projects. Given the company’s track record of declining margins and earnings, investors must weigh whether these assumptions are realistic.

Conclusion: A High-Risk, High-Reward Proposition

ISDN Holdings’ valuation appears undervalued based on intrinsic metrics, but its earnings sustainability remains unproven. The company’s low payout ratio and renewable energy investments suggest a commitment to long-term growth, yet declining ROE and earnings highlight operational challenges. While the 2026 outlook offers hope, the path to profitability is fraught with risks. Investors should approach with caution, treating ISDN as a speculative bet on its renewable energy ambitions rather than a buy-the-dip opportunity. The alignment of stock price with fundamentals will ultimately depend on the success of its capital expenditures and the normalization of forex-related headwinds.

Source:
[1] ISDN Holdings (SGX:I07) - Earnings & Revenue Performance [https://simplywall.st/stocks/sg/capital-goods/sgx-i07/isdn-holdings-shares/past]
[2] ISDN Holdings Ltd (Singapore): 1H25 Earnings Impacted by Forex Losses, Strong Revenue Growth, Positive FY26–27 Outlook [https://www.minichart.com.sg/2025/08/25/isdn-holdings-ltd-singapore-1h25-earnings-impacted-by-forex-losses-strong-revenue-growth-positive-fy26-27-outlook-12/]
[3] ISDN Holdings Reports Strong Revenue Growth and Expands Renewable Energy Capacity [https://www.tipranks.com/news/company-announcements/isdn-holdings-reports-strong-revenue-growth-and-expands-renewable-energy-capacity]
[4] ISDN Holdings (SGX:I07) Statistics & Valuation Metrics [https://stockanalysis.com/quote/sgx/I07/statistics/]
[5] ISDN Holdings Limited (I07.SI) - Yahoo Finance [https://finance.yahoo.com/quote/I07.SI/key-statistics/]
[6] ISDN acquires 51% stake in Indonesian hydropower firm PT Funda [https://sg.finance.yahoo.com/news/isdn-acquires-51-stake-indonesian-020737474.html]