Innovalues Ltd - CIMB Research 2016-01-18: Plant visit in Malaysia

Innovalues Ltd - CIMB Research 2016-01-18: Plant visit in Malaysia INNOVALUES LIMITED 591.SI 

Innovalues Ltd - Plant visit in Malaysia 

  • Visited Innovalues’ plant in Malaysia, which is its largest and houses both AU and OA operations. 
  • Continued investments in equipment and processes to help retain competitive edge. 
  • Superior surface treatment capabilities may bring more business opportunities. 
  • An attractive M&A target in the midst of privatisation plays of similar firms. 
  • Maintain Add with DCF-derived TP of S$0.93; FY15-17 dividend yields of 4.1-5.6%. 

■ Attended plant visit in Malaysia 

  • We visited Innovalues’ operations in Malaysia recently. This is the largest and only plant to house both automotive (AU) and office automation (OA) production. Innovalues’ other plants are in Thailand and China. This plant not only recently saw the relocation of OA operations from China, but is also often the test bed for new process implementation. 

■ Machine customisation helps to achieve better margins 

  • During the trip, we saw over 150 CNC machines (mainly Japanese brands), whose average age ranges from 3-4 years old, dedicated to AU operations. 
  • While some parts and processes have been customised to improve efficiency, Innovalues continues to invest in newer but not overly expensive technology. 
  • We see scope for further cost-savings, especially in the final inspection phase that is currently still labour-intensive. 

■ One-stop solutions provider with surface treatment services 

  • Unlike most competitors who outsource their surface treatment services, Innovalues offers in-house plating and surface finishing services for all printer rollers under the OA segment and 30% of its AU parts. These superior surface treatment capabilities (patentbacked) could set the company apart from the rest (current utilisation rate below 40%). 

■ Privatisation plays in the region on the rise 

  • In 2016, we continue to see privatisation plays in the region. Interplex Holdings (INTX SP, Not rated), a leading global precision engineering company, was offered S$0.82/shr by Baring Asia PE fund. IPE Group (HK 0929, Not rated), a similar high precision metal component manufacturer, was offered HK$1.5/shr by Baoan Technology Company, translating into 14.2x P/E and representing a premium of 36.4% over the last closing price. 

■ Innovalues: an attractive M&A target? 

  • Besides longstanding business relationships with key clients like Sensata and Hilite International, Innovalues also boasts strong precision engineering capabilities that generate superior margins (GPM of 28-30%). 
  • Its strong cash-generating ability and earnings growth momentum could warrant a premium vis-à-vis its peers. 

■ Reiterate Add 

  • We remain positive on the long-term outlook of Innovalues in view of the secular growth trend of increasing sensor usage in cars globally. 
  • Key risk in the near-term is order delay or cancellation from customers. 
  • We maintain our Add call and DCF-based target price of S$0.93 (WACC: 12.9%), with forecasted FY15-17 dividend yields of 4.1-5.6%.

William TNG CFA CIMB Securities | NGOH Yi Sin CIMB Securities | http://research.itradecimb.com/ 2016-01-18
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.93 same 0.93