Innovalues Ltd - UOB Kay Hian Research 2016-08-04: 2Q16 Results In Line; M&A Talks Still Ongoing

Innovalues Ltd - UOB Kay Hian Research 2016-08-04: 2Q16 Results In Line; M&A Talks Still Ongoing INNOVALUES LIMITED 591.SI 

Innovalues (IP SP) 2Q16: Results In Line; M&A Talks Still Ongoing

  • Innovalues’ 2Q16 results were in line with our expectation with the automobile sector once again coming in as the primary contributor of revenue. 
  • Gross margin improved slightly on the back of the group’s prudent approach to business headwinds as well as its focus on cost control and productivity. 
  • Maintain BUY with a DCF-based target price of S$1.06. 
  • However, should an M&A materialise, the stock could trade above S$1.20 based on comparable transactions.



RESULTS


Results in line with expectations. 

  • Innovalues’ net profit rebounded from a weak 1Q16 as it recorded a 63% qoq improvement in net profit and a 10.6% qoq growth in revenue in 2Q16. The improvement was mainly driven by the automotive segment which accounted for about 79% of 2Q16 sales. 
  • Revenue from the automotive segment rose 4.4% yoy to S$23.8m due to an increase in orders from customers in China. 
  • The S$10.1m net profit in 1H16 represents 43% of our full-year net profit estimate for 2016. 
  • The S$57.4m of revenue recorded in 1H16 represents about 45% of our full-year sales estimate.

Management has guided for a stronger showing in 2H16. 

  • Barring any unforeseen circumstances, management is cautiously optimistic about a stronger financial performance in 2H16. 
  • We believe the group’s continued focus on cost control and ongoing productivity measures could potentially surprise us on the upside.

M&A still ongoing. 

  • Innovalues has once again issued a statement to re-iterate that discussions are still ongoing on a possible transaction which may or may not lead to an offer for the shares of the company. This remains the main catalyst for the stock and in our view, should an M&A occur, the shares could trade north of S$1.20 based on comparable transactions.


EARNINGS REVISION/RISK

  • No change in our earnings estimates. We project a 3-year EPS CAGR of 11.5% in 2015-18.


VALUATION/RECOMMENDATION

  • Maintain BUY with a DCF-based target price of S$1.06 (cost of equity: 10%, terminal growth: 0%). 
  • Innovalues remains one of our key mid-cap picks, given its strong earnings growth as well as financial position. 
  • On our estimates, the stock offers a resilient dividend yield of 3.9% and 4.6% for 2016-17 respectively.
  • In the event of an M&A, we think the stock could trade up to S$1.20, which is based on the renewed mandatory conditional cash offer for IPE Group of HK$1.70 in early-Mar 16.


SHARE PRICE CATALYST

  • Details on a potential M&A or positive news flow of other M&As in the precision engineering space.
  • Other potential catalysts include better-than-expected earnings.




Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-04
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.06 Same 1.06


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