INNOVALUES LIMITED
591.SI
Innovalues (IP SP) Considering Strategic Options; Strong Hint At M&A ahead?
- Innovalues announced that it is considering “strategic options” to enhance and unlock shareholder value. While not definitive, this could be a potential indicator of an M&A.
- Maintain BUY with a DCF-based target price of S$1.06, but based on comparable M&A transactions, we think our target price could rise up to S$1.22 should an M&A materialise.
WHAT’S NEW
Share price excitement on potential M&A.
- The group announced yesterday that they have appointed Rippledot Capital Advisors (RCA) to conduct a review of strategic options with a view of enhancing and unlocking shareholder value.
- RCA is a well-regarded independent strategic and financial adviser to corporate entities, entrepreneurs and investors focused in the Asia Pacific region. RCA has advised on over US$50b of transactions in the Asia Pacific Region, including the privatisation of Goodpack.
STOCK IMPACT
Positive industry dynamics.
- The current environment of low gas prices and low interest rates has spurred demand for new cars. Auto sales in the US hit a record high of 17.47m units in 2015 with expectations of a strong 2016 as more young buyers enter the market. The Chinese government cut the 10% purchase tax in half on cars with engine capacity of less than 1.6 litres.
High barriers to entry and solid customer relationships make Innovalues attractive.
- In 2014, Innovalues derived over 80% of its total revenue from the automobile segment.
- The auto segment has high barriers to entry due to the time it takes to attain qualifications and automakers’ long-standing relationships with customers. Innovalues spent about two years to achieve certification for the production of auto components.
Strong financials could attract suitors too.
- The group’s strong cash generation and low capex requirements could see its net cash rise up from S$0.08 per share in 2015 to almost S$0.20 per share in 2018.
- In addition, free cash yield is estimated at 7.5% and 8.7% for 2016 and 2017 respectively.
Why an M&A could be possible.
- In our view, an M&A should not come as a surprise, as in Dec 15 alone, there were two precision engineering-related takeover deals in the region. We consider IPE Group in Hong Kong the more comparable transaction of the two. IPE was acquired at a trailing PE of 17.4x. This multiple would imply a fair value in excess of S$1.20 based on Innovalues’ trailing 12-month PE ratio.
- Innovalues’ 2015 favourable net cash position, free cash flow generating capabilities, strong management team and strong cost control measures make the group a potential buyout target.
EARNINGS REVISION/RISK
- No change in our earnings estimates. We project a 3-year EPS CAGR of 11.5%.
VALUATION/RECOMMENDATION
Maintain BUY with a DCF-based target price of S$1.06 but trade cautiously.
- Innovalues remains as our key mid-cap pick given its earnings growth as well as strong financial position, but we would trade cautiously after its recent share price strength.
- On our estimates, the stock offers a resilient dividend yield of 3.7% and 4.4% for 2016 and 2017 respectively.
- In the event of an M&A, we think the stock could trade up to S$1.20, which is based on the renewed mandatory conditional cash offer for IPE Group of HK$1.70 in early-Mar 16.
SHARE PRICE CATALYST
- Details on potential M&A or positive news-flow on other M&As in the precision engineering space.
- Other potential catalysts include better-than-expected earnings.
Nicholas Leow
UOB Kay Hian
|
Andrew Chow CFA
UOB Kay Hian
|
http://research.uobkayhian.com/
2016-03-29
UOB Kay Hian
SGX Stock
Analyst Report
1.06
Same
1.06
