Innovalues Ltd - CIMB Research 2016-02-22: Constant velocity ahead

Innovalues Ltd - CIMB Research 2016-02-22: Constant velocity ahead INNOVALUES LIMITED 591.SI 

Innovalues Ltd - Constant velocity ahead 

  • Innovalues’s FY15 core net profit of S$18.3m was in line with our estimate at 101% and consensus at 96%, increasing 23.6% yoy. 
  • FY15 bottom-line benefited from higher gross margin of 30.7%, with scope for further expansion in FY16 given ongoing initiatives. 
  • Sales weakness in 2H15 likely to extend to 1H16 as key customers ease excessive inventory; look forward to FY17 for better growth. 
  • We trim FY16-17 EPS and tweak our DCF-based target price (WACC: 12.9%). 

Stronger growth from office automation (OA) segment 

  • 4Q15 revenue was slightly down by 3.7% yoy, mainly due to slower AU sales (-6.5% yoy) mitigated by 14.4% yoy growth in the OA segment. 
  • On a full-year basis, FY15 sales grew 4.8%. Innovalues saw signs of AU sales tapering in 2H15 as both key customers faced macroeconomic headwinds and scaled back orders to ease excessive inventory. 
  • FY15 core net profit rose 23.6% yoy 4Q15 reported gross margin of 33.7%, higher than 3Q15’s 28.4% and 4Q14’s 30.4%, despite constant cost reduction pressure from customers. 
  • The margin expansion was led by a stronger US dollar, lower raw material costs and cost-savings from the relocation of OA operations in China to Malaysia in 3Q15. 
  • Excluding FX gains of S$4.5m and other non-recurring items, FY15 core net profit improved 23.6%. 

FY16: focus on margins 

  • While FY15 gross margin of 30.7% was above management’s guidance of 28-30%, we think there is scope for better margins in FY16-18 as increasing automation of the China operations is in the pipeline. 

FY17: higher sales growth could return 

  • Following a weak 2H15, we expect 1H16 to be slow before orders return more strongly in 2H16. We continue to like Innovalues’ engagement on new projects and with other tier-1 automotive suppliers, which should gain traction in another few years. 
  • As one of the only two suppliers, Innovalues remains competitive in its pricing for the OA segment and has room for expansion (current utilisation rate: 40%). 

Key automotive (AU) clients see growth in China 

  • Sensata and VW have observed good growth potential in China, where Innovalues already has a presence and could be a potential beneficiary. 
  • In its 4Q15 results briefing, Sensata announced the transfer of some US manufacturing to China by end-17, as well as increasing sensor content per vehicle in China (currently $8-10, vs c.$40 in the US and Europe). 
  • VW also reported its expectations for China sales to move in line with the overall auto market in 2016, as it explores a new tie-up with domestic firm JAC Motors. 

Reiterate Add 

  • As we trim our FY16-17 EPS estimates by 2.4-4.4% on slower sales outlook, our DCF-derived target price falls slightly to S$0.92 (WACC:12.9%). 
  • Innovalues’s FY15 DPS of 3.8 Scts beats our forecasted DPS of 3.2 Scts, translating into a payout ratio of 53.7% and dividend yield of 4.6%. 
  • Key risk is further order pushback. Maintain Add.

William TNG CFA CIMB Securities | NGOH Yi Sin CIMB Securities | 2016-02-22
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.92 Down 0.93