Innovalues - Maybank Kim Eng 2016-05-04: No surprise in 1Q; TP raised

INNOVALUES LIMITED 591.SI

Innovalues (IP SP) No surprise in 1Q; TP raised

A soft 1Q16 was expected. Management had earlier cautioned of a weaker 1H16 due to adverse FX changes and a high comparison base.
Short-term focus will be the ongoing M&A process announced in early Apr. We believe Innovalues will add value to any buyer given its strategic automotive focus and strong growth prospects. Its high exposure to growing US/EU auto markets is likely to be coveted as well.

TP raised 15% to SGD1.15, based on 15x earnings (from 14x), a 10% discount to global peer valuations, which have recently risen.

1Q16 NP (-31% YoY) was affected mainly by a FX loss of SGD1m vs. a gain of SGD0.4m in 1Q15.
Excluding FX, core NP fell 7% YoY and was flattish QoQ - in line with guidance.
Both AU and OA revenue fell YoY, but this was also within our expectation as 1Q15 benefited from the spillover of revenues from 4Q14.
Cashflow stayed strong, with FCF of SGD3.5m pushing net cash to over SGD30m, a record high.
GP margin was sustained at > 31% on good cost management.

Short-term, the main focus will still be the M&A process that started in early Apr when Innovalues appointed Rippledot to look for potential buyers.
We continue to believe Innovalues will add value to any buyer given its automotive-driven growth prospects, superior margins and healthy ROIC.
Its high exposure to US/EU automotive markets, where growth has returned, is also likely to be viewed positively by prospective bidders trying to break into these markets.

Management expects 2H16 to be stronger, with momentum already starting in 2Q.
We maintain our revenue/NP forecast of 12%/12% (including FX).
We raise our TP to SGD1.15, or 15x P/E (from 14x), a 10% discount to valuations of global peers, which have recently risen.
Sensata, Innovalues’ biggest auto customer, also reported an aboveexpectations 1Q, setting the tone for a better year ahead.
Maintain BUY.

Faster sensor adoption by auto and non-auto industries.
Increasing share of customers’ allocations as part of their manufacturing relocation to Asia from US/Europe.
Higher margins from better-than-expected productivity and efficiency gains.

Weak major economies or markets that could hurt vehicle sales.
Delays in ramp-up of production. Could arise in 2016 as there will be more new customers than usual.

Gregory Yap CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-04

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.15 Up 1.00