Innovalues Ltd - DBS Research 2016-05-04: A tepid 1Q16, as expected

Innovalues Ltd - DBS Research 2016-05-04: A tepid 1Q16, as expected INNOVALUES LIMITED 591.SI 

Innovalues Ltd - A tepid 1Q16, as expected

  • 1Q16 net profit declined 31.1% y-o-y to S$3.8m, which was largely within our expectations
  • Weakness due to spill-over effects from inventory management efforts of key AU client in 4Q15 and net foreign exchange transaction loss of c.S$1m
  • Forecasts unchanged given expectations of stronger 2H16, but downgrade to HOLD as current share price is close to our TP of S$1.01



Downgrade to HOLD as current share price is close to our TP of S$1.01; 

  • Downgrade to HOLD as current share price is close to our TP of S$1.01; Beneficiary of automotive megatrend towards safety and eco-efficiency. 
  • Innovalues is a beneficiary of rising 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 under penetrated 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 9.9% CAGR from c.US$80bn in 2013 to nearly US$154bn in 2020. 
  • Through partnerships with Sensata and TE Connectivity, Innovalues also hopes to venture into the industrial segment, which could be the next leg of growth.


Margin improvements on cost advantages and focus on operating efficiency and productivity. 

  • 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 its EBIT margins from 19% in FY15 to 22% in FY17F on enhanced productivity.


Valuation:

  • Downgrade to HOLD as current share price is near our TP of S$1.01. 
  • 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 could further re-rate as the group ramps up its 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/ 2016-05-04
DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 1.01 Same 1.01


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