Global Invacom Group Limited - DBS Research 2016-11-21: SMC Radar Exploration

Global Invacom Group Limited - DBS Vickers 2016-11-21: SMC Radar Exploration GLOBAL INVACOM GROUP LIMITED QS9.SI

Global Invacom Group Limited - SMC Radar Exploration

  • Global Invacom Group Limited (“Global Invacom”) – listed on the Mainboard of SGX-ST in 2012 via RTO – is primarily engaged in the design, manufacture and supply of satellite communications equipment to large-scale satellite broadcasters. Currently trading at similar valuations to larger peers’ 24x T12M PE, Global Invacom appears fairly valued but could re-rate if the commercial success of its new technologies is demonstrated and earnings are delivered on a sustained basis.
  • Incorporated in 1985, Global Invacom is a leading player in the field of integrated satellite communications equipment, where it is principally engaged in the research and development, design and supply of satellite communications products to large-scale satellite broadcasters. In addition, the group is also involved in the complementary contract manufacturing business, which is served out of its facility in Shenzhen, China.


About Global Invacom Group Limited

  • Well supported by its global manufacturing footprint (of seven manufacturing plants across China, Israel, Malaysia, the United Kingdom and United States), Global Invacom supplies an extensive range of products and services – from satellite dishes, low noise blocks and switches to video distribution components and waveguides – that are used in and/or serve the consumer electronics, computer peripherals and medical industries. As a result of ongoing R&D efforts and focus on innovation, Global Invacom currently boasts a total of 60 granted patents and has a further 64 patent applications.
  • Global Invacom had a challenging FY15 and recorded a loss of US$1.1m on a combination of delays in sales from three main customers in the first half of 2015 (which were destocking as the industry hit a technological inflection point), delays in production due to the lack of semiconductor devices, and the incurrence of one-off expenses in the acquisition and restructuring of Skyware Global.
  • This was against net sales of US$129.1m (-3.7% y-o-y), which can be broken down into the following key business segments: 

(a) Satellite Communications (78.9% of FY15 revenue) 

  • Under the group’s bread-and-butter satellite communications business, core activities mainly involve the design and manufacture of satellite TV products, with its customers ranging from broadcasters, building and electrical contractors to satellite installers and mobile system integrators.
  • Contributing approximately four months’ revenue, or US$17.5m in FY15, the acquisition of Skyware Global (completed in August 2015) extended the group’s portfolio of antenna products – cementing its position as the only player offering a complete package of satellite communications products (from antennas and electronics to accessories).

(b) Contract Manufacturing (21.1% of FY15 revenue) 

  • Based in China, Global Invacom’s contract manufacturing business is focused on third-party printed circuit board (PCB) assembly, logistics, and module assembly and testing.
  • The lion’s share of Global Invacom’s revenue comes from the US, which formed 59% of its FY15 sales. Outside of the US, Europe accounted for 26% and Asia, 11%. The remaining 4% was jointly contributed by various countries across the globe. While the bulk of Global Invacom’s demand currently stems from developed countries, we see a greater shift in Global Invacom’s geographical mix as it seeks to capitalise on the higher expected demand for HD and 4K content from satellite broadcasters in emerging markets.



  • According to the Satellite Industry Association’s 2016 State of the Satellite Industry Report prepared by The Tauri Group, the global satellite communications market grew by 3% y-o-y to US$208.3bn in 2015, mainly as the consumer services sector lifted demand for satellite services (primarily satellite television, satellite broadband and Earth observation services).
  • While technological advancements in the pay-TV industry and expansion of broadband Internet services should bode well for the medium-term demand for satellite ground equipment, we think headwinds from the current inflection in Low Noise Blocks (LNB) technology will likely persist in the near term as customers continue to transition to the new technology.
  • However, we note that Global Invacom has completed R&D for the next generation of LNB technology and has secured production approval for volume supply to its largest customer, which will commence in 4Q16, and also hopes to complete R&D and deploy DCSS technology across its LNBs for all customers and territories over the next year. If successful, we believe that this will likely be a significant driver for the group ahead.
  • Even though Global Invacom has made good progress on restructuring, labour efficiencies and cost management – which has allowed the group to post its second consecutive quarter of profitability in 3Q16, eking out a profit of US$0.3m (thus narrowing YTD losses to US$0.1m as at end-9M16). The company still sees room for efficiency improvements and optimisation ahead, especially in the areas of direct material costs and fixed costs.

Key Risks: 

  1. the ability to restructure and unlock value from the recently acquired Skyware Global, which was still loss-making in 2Q16, 
  2. currency risk due to the group’s geographically diversified manufacturing bases, 
  3. qualification and commercial success of new product innovations and/or technologies, 
  4. customer concentration risk, and
  5. unanticipated shifts in technology.


Valuations:

  • Global Invacom currently trades at similar valuations to larger peers’ 24x T12M PE, and appears fairly valued. The counter could re-rate if: 
    1. the group’s next-gen LNB technology attains commercial success, 
    2. further technological advancements are unlocked alongside ongoing R&D initiatives, and 
    3. earnings are delivered on a sustained basis.


NOT RATED
Target Price: N/A



Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-11-21
DBS Vickers SGX Stock Analyst Report NOT RATED Maintain NOT RATED 99999 Same 99999




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