Innovalues Ltd - CIMB Research 2016-08-02: On track for stronger 2H16

INNOVALUES LIMITED 591.SI

Innovalues Ltd - On track for stronger 2H16

1H16 sales of S$57.4m in line with our/consensus full-year forecasts at 45%.
Supported by steady margins, 1H16 core net profit was also in line with our expectations, at 45% of our FY16 forecast, but below consensus at 41%.
Management sees good growth in key AU and OA customers’ orders for FY16-18.
Cash-generative, FY16-18F dividend yields of 4.5-5.3%, with potential M&As.

FY16-18 forecasts unchanged, but EPS estimates and DCF-derived TP fell marginally due to enlarged share base. Maintain Hold recommendation.

We saw sequential sales improvement in 2Q16 (vs. 1Q16), driven by 38.8% qoq growth in office automation (OA) and 4.9% qoq growth in automotive (AU). However, 1H16 saw yoy sales decline of 2.1%, dragged down by exceptionally weaker 1Q16.
AU segment remained the primary revenue contributor (key customers: Sensata and Hilite), accounting for 81% of 1H16 topline vs. 78% in 1H15.
We believe such good traction in quarterly sales will culminate in a stronger 2H16.

2Q16 gross margin crept up slightly to 31.6%, from 31.1% previously in 1Q16 (2Q15: 29.9%), thanks to qoq revenue growth of 11% and better operational efficiency.
Continuing sales growth could generate economies of scale to support steady margins. There was minimal one-off FX impact in 1H16.
Overall, IP reported 1H16 core net profit of S$9.9m, in line with our full-year estimates at 45%.

Volkswagen (VW) management recently revised its 2016 car sales guidance to slightly beyond the 9.93m cars delivered in 2015, on higher demand from China (VW’s largest market) and western Europe. Recall that IP also supplies precision metal components to VW via Hilite.
Apart from strong automotive pressure transducer (APT) demand from Sensata, direct relationships with newly-acquired customers, VW and Cummins, will become more significant for IP from FY18 onwards.

We saw sustained strength in IP’s cash-generative business, as free cash flow was healthy at S$8.2m after factoring in the capex of S$3.3m in 1H16, vs. S$9.0m in 1H15 (capex: S$2.7m). This should support our FY16-18 forecasted dividend yields of 4.5- 5.3%, based on historical payout of c.50% of FCF.
The company also had a net cash position of S$28m as at end Jun-16.

IP remains a well-loved company for its exposure to increasing sensor usage globally, strong cash-generating ability, and established relationships with OEMs and tier-1 automotive players.
Ongoing privatisation talks remain a key catalyst for the stock, while key downside risk to our call is unexpected pushback in production orders.
We retain our FY16-18 assumptions, but our EPS estimates and DCF-based (WACC: 12.9%) target price drop (to S$0.91) on the back of share options exercised.
Maintain Hold.

NGOH Yi Sin CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-08-03

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.91 Down 0.92