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%).

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%.

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.

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%).

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.

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 | http://research.itradecimb.com/ 2016-02-22

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.92 Down 0.93