Innovalues Ltd - CIMB Research 2015-10-01: Revving up with smarter cars

Innovalues Ltd - CIMB Research 2015-10-01: Revving up with smarter cars INNOVALUES LIMITED 591.SI 

Innovalues Ltd - Revving up with smarter cars 

  • Increasing sensor content growth per car and order volume from existing clients will drive FY15-17 overall topline growth of 13% p.a. on average. 
  • Minimal sales exposure to VW. Expect temporary negative sentiment, but could offer more opportunities in the long term. 
  • Potential to increase order allocation from key clients, Sensata and Hilite. 
  • FY15-17 topline estimate cut by 2.7-3.9% but DCF-based target price is intact. 
  • Steady gross margin, cash-generative and dividend yield of 5.2-6.7% for FY15-17. 

Non-deal roadshow with Innovalues’ management 

  • On 30 Sep, we hosted an NDR for Innovalues which was well-attended. There were several questions raised about the outlook for the automotive and sensor market, supply chain for tier-1/2 clients, margin expansion and the fallout from the Volkswagen scandal. 

Number of automotive sensors: past, present, future 

  • Five years ago, the estimated number of sensors in a car was 30-40. Today, this has increased to > 50 (industry source: 60-100). This number could go up to 200 in future. We note that the level of sensor usage in high-end brands is greater than in basic models. 

Deeper penetration of Sensata and Hilite 

  • Customer relationships with the likes of Sensata Technologies and Hilite International tend to be ‘sticky’ as AU parts suppliers generally take 1.5-2 years and numerous rounds of testing to be qualified. As Innovalues is able to offer quality products at competitive pricing against some US-based peers, it could increase its market share for Sensata’s AU products from c.20% to 30%. 

Volkswagen directly contributes < 1% to 1H15 revenue 

  • VW/Audi only became new clients in Oct 2014 and their direct revenue contribution is still insignificant at < 1%. Management estimates that overall exposure (tier-1 and 2 combined) to VW is also not significant. While there may be negative sentiment spilled over from the VW emission issue, we believe that in the long term, demand for sensors is still robust. 

Softer 3Q15, new projects in the pipeline for FY16-17 

  • The 3Q15 outlook for the AU segment may be softer, but it could be offset by a stronger office automation (OA) segment, according to management. We trim our FY15 revenue by 3.9%, and expect new projects to contribute more significantly in FY16-17. We also inch our FY15 gross margin upwards from 29.2% to 29.5%, and our DCF-derived target price of S$0.93 remains intact. 

Trading at 8.1x FY16 P/E with FY15-17 dividend yield of 5.2-6.7% 

  • Innovalues is currently trading at 8.1x FY16 P/E, which is a 40% discount to Sensata’s 13.3x. We continue to like the company for its promising growth prospects, cash generative business and attractive dividend yield of 5.2-6.7% for FY15-17. 
  • We reiterate our Add rating and DCF-based target price of S$0.93 (WACC: 12.9%).

William TNG CFA CIMB Securities | NGOH Yi Sin CIMB Securities | 2015-10-01
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.93 Same 0.93