Innovalues - Maybank Kim Eng 2016-10-06: In for a Penny, in for a Pound

Innovalues - Maybank Kim Eng 2016-10-06: In for a Penny, in for a Pound INNOVALUES LIMITED 591.SI

Innovalues - In for a Penny, in for a Pound


Opportunity for longer-term entry 

  • The stock has retreated since it hit a high of SGD1.11 in July, but we remain positive. 
  • Improving revenue growth and margin expansion on current valuations still support our positive view. 
  • The M&A process has been ongoing since April and we believe impatient investors who bought the stock hoping for a quick conclusion may finally be throwing in the towel. This opens up room for longer-term holders to get in. 
  • We maintain BUY with a Street-high TP of SGD1.15 (13.5x FY17 P/E, 10% below peers).


Lengthy M&A talks shaking out weak holders 

  • Recent weakness could be due to investors impatient with the lengthy M&A process. It updated on 2 Oct that talks with buyers are still in progress, unchanged from a month ago. Beyond that, there have been no new developments announced since it engaged advisor Rippledot in April.
  • Meanwhile, other M&A situations such as Tat Hong and CWT have called off talks or share prices have been volatile, adding to the jitters. But this opens up an opportunity for longer-term holders to enter, in our view.


A fundamental better buy at lower levels 

  • Fundamentally, Innovalues is looking more attractive at current levels. It is a reasonable-growth, net-cash company with high margins and ROE trading at just 10-11x PE and offering c.5% dividend yield. 
  • Growth is also on track. 3Q is tracking in line with management guidance, and 2H16 should beat 1H16 with improving sales and margins. Major customers such as Sensata and VW have done better than expected, and we also understand that it has secured a new automotive OEM customer recently.


If it happens, M&A will be a bonus 

  • We still think Innovalues will make a good M&A candidate for the right buyer. In our view, they could be automotive-oriented private equity funds or industry buyers. 
  • Given Rippledot’s appointment in April and the typical timeline of such a transaction, the due diligence should be done by now and the discussion should be around pricing. 
  • A range of SGD1.00- 1.20 (7-8.5x FY17E EV/EBITDA) should be acceptable to the market.


Swing Factors


Upside

  • Faster sensor adoption by auto and non-auto industries, especially following VW’s emissions cheating scandal.
  • Increasing share of customers’ allocations as part of their manufacturing relocation to Asia from US/Europe.
  • Higher margins from better-than-expected productivity and efficiency gains.

Downside

  • Weak major economies or markets that could hurt vehicle sales.
  • Delays in ramp-up of production. Could arise in 2017/18 as more new customers are expected to ramp up production by then.




Gregory Yap CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-10-06
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.150 Same 1.150



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