Innovalues - Maybank Kim Eng 2016-08-03: Revenue Growth Restarts, M&A Discussions In Progress

INNOVALUES LIMITED 591.SI

Innovalues (IP SP) - Revenue Growth Restarts, M&A Discussions In Progress

At c.20% off the peak, Innovalues ticks all the boxes for a fundamental buy.
Trading at <11x FY17 P/E (>20% below peers), we forecast 30% core EPS growth with 4-5% yield this year.
2Q16 confirmed an improving sales trend with better margins. Catalysts lie in dividend upside and a potential 30% takeout premium.

No interim dividend was declared this time due to on-going M&A discussions, which suggests talks are at an advanced stage.
BUY, TP SGD1.15 @ 13.5x FY17 PE, in line with peers.

2Q16 delivered on expectations of sequentially improving results.
Core NP rose 7% YoY/10% YoY QoQ while gross margin improved on both a QoQ and YoY basis to 31.6%.
Sales rose 2% YoY, the first positive quarter of YoY growth since 3Q15, driven by automotive (+4% YoY).
Management continued to guide for a stronger 2H. In fact, 2Q16 was the first quarter ever that sales exceeded SGD30m.
Free cashflow remained strong at 2.5 cts a share in 1H16, with net cash of 9 cts a share.

Orders should remain strong in 2H16.
Major customer Sensata has performed at the high-end of its guidance and recently raised the low- end of its revenue/EPS guidance. Also, VW has outdone all expectations. Despite the emissions scandal last year, it outsold every other brand in 1H16 and is today the biggest automaker in the world. Innovalues supplies directly to VW.
Other new customers such as Continental, TE Connectivity and Cummins are also coming along nicely.

With projected FY16 capex remaining low, there could be upside to our dividend forecast, especially with net cash expected to rise to SGD0.11 a share, while 8% FCF yield comfortably exceeds the 4.5% dividend yield.
On the M&A front, progress is being made regarding the sale of the company. The company disclosed twice in July alone that it is in active discussions and it confirmed this again on 2 Aug.
In the event of a takeover, we value Innovalues at SGD1.20 (c.20% discount to major customer Sensata’s EV/EBITDA of 12x).

Faster sensor adoption by auto and non-auto industries, especially following VW’s emissions cheating scandal.
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 2017/18 as more new customers are expected to ramp up production by then.

Gregory Yap CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-08-03

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.15 Same 1.15