Semiconductors play a large role in ISDN&rsquo s business, but diversifying away from them is crucial to its strategy, says managing director and president Teo Cher Koon

 

AS INDUSTRIAL automation evolves, ISDN Holdings : I07 0% has kept its finger on the pulse of changes and adapted its offerings to better fit the evolving market.

 

Describing the company as &ldquo flexible&rdquo , managing director and president Teo Cher Koon highlights that ISDN has multiple manufacturing plants and factories, particularly in China, to cater to various customers&rsquo requests.

 

The company provides solutions to power factories, energy plants and other such infrastructure. This means the services ISDN offers to businesses can vary widely, ranging from small components and modules to an entire warehouse with robots that can be programmed from a dashboard.

 

For example, in the second half of 2020, the company went into metal injection moulding to create stainless steel and titanium components, as customers were looking to produce stainless steel parts in a more environmentally friendly way.

 

&ldquo We see more and more demand (for stainless steel components) in the medical field, cosmetics equipment industry and other equipment makers,&rdquo Teo said.

 

But what exactly is industrial automation? When ISDN was founded in 1986, it was largely about power transmissions, said Teo. It now refers to &ldquo more intelligent&rdquo system controls, including the software needed to automate functions in, say, an industrial building.

 

In particular, Teo noted a higher need for supply chain, warehouse and Internet-of-Things management.

 

He said that the software suite ISDN has developed has &ldquo a solid synergy&rdquo with its smart building solutions, such as warehouses and factories. They can be used in different industries, from food and beverage to manufacturing and distribution.

 

A cycle of ups and downs

Semiconductors play a large role in ISDN&rsquo s business, but the segment is markedly smaller as a proportion of its entire portfolio than it was in 2005, when the company first listed on the Singapore Exchange.

 

Then, it made up about 50 per cent of its overall turnover today, the segment is at about 25 to 30 per cent of total revenue.

 

Teo said that diversifying away from semiconductors is crucial to ISDN&rsquo s strategy. &ldquo Semiconductors are very cyclical &ndash too cyclical that it is actually not ideal for any company (to rely on).&rdquo

 

That said, the effect of the past year&rsquo s global semiconductor downcycle was apparent in ISDN&rsquo s earnings. For the second half of the year ended Dec 31, 2023, the company&rsquo s sales slipped 4.1 per cent on-year to S$172.6 million.

 

Similarly, its overall revenue for FY2023 declined 7.8 per cent to S$341.8 million year on year.

On a segmental basis, the company&rsquo s South-east Asia industrial automation business, which accounts for about 21 per cent of total revenue, was hit the hardest by the downturn. Revenue from the segment fell 28.3 per cent, mainly dragged down by poor semiconductor performance.

 

The China industrial automation business, which makes up 73 per cent of revenue, logged a 2.4 per cent increase, although the growth was stunted by a weakened Chinese yuan against the Singapore dollar over the year.

 

As ISDN rode out the downcycle, the company chose to re-invest and build its capabilities. Its board is of the view that investing during such downturns can create stronger growth during the economic recovery.

 

Reinvesting in its business, however, led to a 89.5 per cent dive in net profit for the second half to S$372,000. Its full-year net profit likewise slipped, down 66.1 per cent to around S$5 million.

 

Nonetheless, Teo believes the worst of the semiconductor downturn is over, as the second half of FY2023 had shown sequential recovery when compared to the first half.

 

With the current artificial intelligence boom resulting in an uptick in chip demand, the managing director believes that semiconductors will soon become well-sought after.

 

&ldquo When the semiconductor trend comes (up), it will give you a spike. It&rsquo s this spike that will be exciting to any company in terms of its top and bottom line,&rdquo said Teo.

 

Push into renewable energy

While semiconductors are poised to return, ISDN is keen to explore other fields. In this vein, the group has a bright spot in renewable energy, which it entered in the 2016-2017 period.

 

The group brought its three hydropower plants to commercial operation sometime around 2022 to 2023.

 

Teo said among the renewable energy types, hydropower &ldquo made a lot of sense&rdquo to ISDN, as its plants can have minimal environmental impact as it largely redirects waterways and channels it back to the river.

 

Located in a cluster in Indonesia, the total operation capacity of the powerplants is 24.6 megawatts (MW), noted Teo. They are estimated to contribute a recurring stream of annual net cash income of around S$8 million a year for the next 20 to 25 years.

 

ISDN plans to add two more hydropower plants, each with a 10 MW capacity, to the cluster, scheduled to be operational in 2026.

 

In FY2023, the group recognised S$3.1 million operating revenue and S$3.6 million finance lease income as revenue from the three hydropower plants.

 

While the segment is still small compared to industrial automation in China and South-east Asia, Teo said ISDN could eventually consider spinning it off.

 

&ldquo This is so we can segregate the businesses better, but only when (the energy segment) is more sizeable,&rdquo he said.