Innovalues Ltd - CIMB Research 2016-10-12: Merging onto the highway

Innovalues Ltd - CIMB Research 2016-10-12: Merging onto the highway INNOVALUES LIMITED 591.SI

Innovalues Ltd - Merging onto the highway

  • We believe Innovalues is on track to attain 10-12% FY16-17F sales growth with gross margin improvement to 32.0%, based on our recent check with management.
  • Channel checks with SG-listed peer and read-through from industry happenings support favourable outlook for Innovalues.
  • Ongoing M&A discussion is a near-term catalyst. A historical transaction P/E range of 12-16x would imply a possible valuation range of S$0.91 – S$1.21 per share.
  • Upgrade to Add on higher DCF-based TP of S$1.03 (WACC: 12.9%) as we factor in higher FY16-18F EPS estimates and roll over to FY17F.

Outlook intact, automotive is the key driver 

  • We remain positive on Innovalues’ overall outlook, and expect a stronger 2H16F as per its earlier guidance. 
  • Our forecasted 10-12% sales growth is mainly led by 
    1. stronger automotive pressure transducer (APT) demand from Sensata, and 
    2. higher VW car sales in China (estimated VW/ Audi direct sales contribution to grow to 2-3% in FY16F and 6-7% in FY17F). 
  • Its new customer, Cummins, could also become more significant from FY18F onwards. AU/ OA sales split is expected to remain stable at 80%/20%.

Sustainable margins 

  • We forecast FY16F gross margin of 32.0% (vs 31.1% previously), better than FY15’s 30.7% (1H16: 31.4%) as stronger US$, greater volume and higher productivity efforts should mitigate any potential cost-down from customers, in our view. 
  • While net FX impact was minimal in 1H16, we believe there could be possible FX gains in 4Q16F if the US$ volatility against regional currencies such as ringgit and Rmb extends.

Cross-checking with industry peers 

  • Following a recent visit to Spindex (SPE SP, NR) we note three key takeaways: 
    1. management sees continual growth in the automotive segment, 
    2. expects gross margin (FY6/16: 22.7%) to improve via increasing automation and higher utilisation, from the current 65-70% rate to 80% (target), and 
    3. higher effective tax rates due to increased output from China and expiry of most tax benefits. 
  • Spindex and Innovalues have similar AU customers, which accounted for 20-30% of Spindex’s FY16F revenue.

M&A talks still ongoing 

  • Taking reference from past transactions with valuation range of 12-16x, we think Innovalues could be valued between S$0.91 to S$1.21 per share based on FY16F EPS of 7.6Scts. 
  • We first highlighted in Jan 2016 that an offer was made by a subsidiary of China Baoan Group to HK-listed IPE Group, valuing it at 16.0x TTM P/E. 
  • Recall also that MMI Holdings was acquired by KKR in 2007 at a historical P/E multiple of 12.3x.

Upgrade to Add, with higher TP of S$1.03 (DCF, 12.9% WACC) 

  • We raise our FY16-18F EPS estimates by 0.1-1.5% on margin expansion, slightly offset by lower projected FX gains. 
  • As we roll over to FY17F, our DCF-based target price rises to S$1.03 (WACC: 12.9%), implying FY17F core P/E of 12.5x. 
  • With the potential catalyst of M&A in sight, we upgrade from Hold to Add. 
  • The stock offers FY16-18F dividend yields of 4.4-5.1% and is currently trading at CY17F P/E of 10.4x, a 15% discount to Sensata’s 12.2x. 
  • Stronger-than-expected earnings is another catalyst.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | 2016-10-12
CIMB Research SGX Stock Analyst Report ADD Upgrade HOLD 1.03 Up 0.910