Innovalues Ltd - DBS Research 2016-02-22: Going big on sensors

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INNOVALUES LIMITED 591.SI 

Innovalues Ltd - Going big on sensors 

Initiate with BUY with 21% upside to TP of S$1.01; Beneficiary of automotive megatrend towards safety and eco-efficiency. 

• Innovalues is a beneficiary of raising awareness and stricter regulatory standards on safety and emissions, as it is a key supplier to Sensata, a leading global producer of automotive sensors. 
• As Innovalues taps into the underpenetrated Chinese automotive sensor market alongside Sensata, we project earnings to grow by 30% from S$23m in FY15 to S$30m in FY17F on 30% revenue growth (from S$114m in FY15 to S$148m in FY17) and modest improvement in margins. 
• Beyond the automotive segment, the long-term multi-sector application potential of sensors also bodes well for Innovalues. 

Beyond automotives, the global smart sensor market is expected to grow at a 9.9% CAGR from c.US$80bn in 2013 to nearly US$154bn in 2020. 

• Through partnerships with Sensata and TE Connectivity, leading producers of sensors, Innovalues also hopes to venture into the industrial segment, which could be the next leg of growth. 

Cost advantages and focus on operating efficiency and productivity improvements to drive earnings. 

• Innovalues’ ability to customise machines and tools in-house enables the company to operate more efficiently than its peers. 
• As its ongoing automation efforts are subsequently rolled out, we expect a boost to EBIT margins from 19% in FY15 to 22% in FY17F on enhanced productivity. 

Valuation: 

• Our 12-month TP of S$1.01 offers potential upside of 21%. 
• Our TP of S$1.01 for Innovalues is based on 12x blended FY16/17F PE, which implies a discount of 20% to peers' average PE of c.15x blended FY16/17F earnings. 
• Its share price should re-rate as the Group ramps up on production and as earnings growth is delivered. 

Key Risks to Our View: 

• Slowdown in global automotive sales could weigh on AU segment. As the automotive segment makes up a significant proportion of Innovalues’ business, a significant slowdown in the global auto market could weigh on the segment’s outlook.

Paul Yong CFA DBS Vickers | http://www.dbsvickers.com/ 2016-02-22

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