Innovalues Ltd - DBS Research 2016-08-03: Offers value at current prices

INNOVALUES LIMITED 591.SI

Innovalues Ltd - Offers value at current prices

Recovery underway as 2Q net profit rebounds +63.9% q- o-q, led by growth in core AU and OA businesses.
Trim earnings slightly by 0.8%/4.3% for FY16F/17F as we remain cautiously optimistic of a stronger 2H16.
Upgrade to BUY with higher TP of S$1.07 after rolling forward our earnings base to FY17F.

Upgrade to BUY with a higher TP of S$1.07 as we roll forward our earnings base to FY17F; current valuation appears attractive for a potential M&A play.
Following 2Q16 results, which were largely in line with our expectations, we only trim our estimates for FY16F/17F slightly by 0.8%/4.3% as we remain cautiously optimistic of a stronger 2H16.
After rolling forward our earnings base to FY17F (from blended FY16/17F previously), we arrive at a higher TP of S$1.07, which offers potential upside of 19%.
As prices have corrected by almost 20% over the past month - from a high of S$1.11 to S$0.895 currently, we see current valuation of 10x FY17F PE as attractive for a potential M&A play.

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 underpenetrated Chinese automotive sensor market alongside Sensata, we project earnings to grow by 25% from S$23m in FY15 to S$29m in FY17F on 24% revenue growth (from S$114m in FY15 to S$141m in FY17) and modest improvement in margins.

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.

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.

Upgrade to BUY with higher TP of S$1.07 as we roll forward our earnings base to FY17F.
Our TP of S$1.07 for Innovalues is based on 12x 17F PE, which implies a discount of 14% to peers' average PE of c.14x. Its share price could further re-rate as the group ramps up on production and as earnings growth is delivered.

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/ 2016-08-03

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