Innovalues Ltd - CIMB Research 2016-05-03: Taking a pit stop

INNOVALUES LIMITED 591.SI

Innovalues Ltd - Taking a pit stop

1Q16 core net profit of S$4.8m was in line with our expectations at 22% of our full- year forecast (we expect a stronger 2H16), but below consensus at 19%.
AU segment sales fell 2.4% yoy to S$22.7m in 1Q16, but grew 4.5% qoq. OA segment sales posted yoy and qoq declines of 19.4% and 11.1% respectively.
1Q16 gross margin remained stable at 31.1%, vs 1Q15’s 31.0%.

We retain our assumptions and TP of S$0.92 (DCF-based, WACC:12.9%).
With an FY16-18F dividend yield of 4-4.7% and limited upside, we downgrade to Hold from Add. Potential M&As remain a near-term catalyst.

IP reported 1Q16 sales of S$27.3m, up 1.5% qoq but down 6.3% yoy.
The automotive (AU) segment has continued to be the key driver, accounting for 83.1% of total revenue in 1Q16.
Both AU and office automation (OA) registered sales declines in 1Q16 against 1Q15, which was an exceptionally good quarter.
We see good sales momentum carrying over from 4Q15 in both segments, which should contribute to a stronger 2H16.

Despite the slight yoy drop in 1Q16 revenue, gross margin held constant at 31.1% (1Q15: 31.0%). This, excluding an FX loss of S$1.0m and other non-recurring items, resulted in a 1Q16 core net profit of S$4.8m, which was 2.6% higher than 4Q15’s but 5.8% lower than 1Q15’s.

Apart from winning new orders from existing key customers like Sensata (especially as it fully integrates its acquisitions) and Hilite, IP continues to work towards new customer acquisitions and increasing automation, backed by higher capex needs of S$7m in FY16 (FY15: S$5.7m). These new projects in the pipeline are expected to contribute more significantly from FY18 onwards.

While we keep our FY16-18 assumptions and target price intact, IP is currently trading at 13.1x FY16F P/E, higher than Singapore industry average of 8.2x and on par with Sensata’s 13.1x.
The stock offers FY16-18F dividend yields of 4-4.7%, based on historical payout of c.50% of FCF.
Given the limited upside, we downgrade IP to Hold from Add, while maintaining our DCF-based target price of S$0.92 (WACC: 12.9%).
M&As in the near-term are potential catalysts, and key risk is order pushback.

We continue to like IP for its earnings outlook (3-year forward EPS CAGR of 11.9%), superior cash-generating ability, and strong relationships with established automotive players (both OEMs and tier-1).
IP remains an attractive play on rising sensor content in automotive production, which is underpinned by stricter safety and efficiency regulations, as well as cleaner environment.

NGOH Yi Sin CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-05-03

CIMB Securities SGX Stock Analyst Report HOLD Downgrade ADD 0.92 Same 0.92