Innovalues Ltd - UOB Kay Hian Research 2016-07-20: Recent Share Price Correction Opens A Window

Innovalues Ltd - UOB Kay Hian Research 2016-07-20: Recent Share Price Correction Opens A Window INNOVALUES LIMITED 591.SI 

Innovalues (IP SP) - Recent Share Price Correction Opens A Window

  • In our view, Innovalues remains one of the best catalyst-driven plays in the Singapore technology sector, backed by strong fundamentals. We see the recent share price correction from its high of S$1.11 as a buying opportunity. 
  • Maintain BUY and DCF-based target price of S$1.06. 
  • Based on comparable M&A transactions, we think the shares could trade in excess of S$1.20 should a potential M&A materialise.


Share price correction brings risk-reward into more palatable territory. 

  • Our target price of S$1.06 implies a decent upside of 12.2% with a dividend yield of about 4%. The group has re-iterated in its announcements on three separate occasions on 7 Apr 16, 3 Jul 16 and 19 Jul 16 that it has appointed Rippledot Capital Advisors Pte Ltd (RCA) to conduct a review of strategic options available to the company. 
  • While not definitive, we view this as a potential indicator of an M&A. 
  • Based on the comparable transaction of IPE Group in Hong Kong, this would imply a fair value in excess of S$1.20 for Innovalues, or an upside of 27% based on its last traded price. 
  • Our target price of S$1.06 implies 12.5x 2017F PE, about 10% premium to peers’. We feel this is justifiable given higher gross margins with little to no borrowings.

Automobile industry dynamics intact post Brexit. 

  • The European Automobile Manufacturers Association recently released data showing new-car sales in the EU rising 9.4% in 1H16 as demand continues to recover, buoyed by cheap credit. June marked the 34th consecutive month of rising automobile sales in Europe. 
  • US light-vehicle sales for 1H16 improved 1.5% yoy, representing a new record for first-half sales in the US. US automobile sales are expected to remain strong in 2H16, backed by high employment levels, stable fuel prices, easy credit and high average age of cars on the US roads. 
  • However, S&P Global Ratings recently cut estimates for US automobile sales to 17.5m units (from 17.8m), citing slowing demand and weaker consumer confidence on the back of the UK voters’ decision to leave the EU. Even at 17.5m units, this would match 2015’s record sales of cars and light trucks. 
  • According to a Bloomberg survey last month, analysts were projecting US light-vehicle sales of slightly fewer than 17.7m units for 2016.


Cautiously optimistic for a stronger 2H16. 

  • The group has guided for a stronger showing in 2H16. The company's 1Q16 results saw weaker demand for both automobile and office automation products, primarily due to spill-over effects from a pushback in orders. 
  • The group will report its 2Q16 results on 2 August and we expect a qoq improvement.


  • No change to our earnings estimates. We project a 3-year EPS CAGR of 11.5%.


  • Maintain BUY and DCF-based target price of S$1.06 but trade cautiously given the volatility in share price. 
  • Innovalues remains one of our key mid-cap picks, given its earnings growth as well as strong financial position. We would trade cautiously after its recent share price volatility. 
  • On our estimates, the stock offers resilient dividend yields of 3.8% and 4.5% for 2016-17F respectively. 
  • In the event of an M&A, we think the stock could trade in excess of S$1.20, which is based on the renewed mandatory conditional cash offer for IPE Group of HK$1.70 in early-Mar 16.


  • Details of potential M&A or positive newsflow from other M&As in the precision engineering space.
  • Better-than-expected earnings.

Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-20
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.06 Same 1.06