Innovalues Ltd - CIMB Research 2016-10-26: Take the full cash offer

Innovalues Ltd - CIMB Research 2016-10-26: Take the full cash offer INNOVALUES LIMITED 591.SI

Innovalues Ltd - Take the full cash offer

  • We deem 9M16 core EPS in line at 71% of our full-year forecast, as we expect a stronger 4Q16F.
  • 3Q16 results were impressive, in our view, with both sales growth (up 11.5% yoy, 4.4% qoq) and gross margin expansion (+1.3% pts qoq, +4.5% pts yoy) to 32.9%.
  • After trading halt, announcement on proposed acquisition by Northstar (PE firm) and Precision Solutions Partners, valuing Innovalues at S$331.4m (13.3x FY16F P/E).
  • We downgrade to Hold and think shareholders should take offer for: a) S$1.01/share in cash, not b) S$0.61 in cash and one HoldCo share (issue price: S$0.40).

Proposed takeover by private equity (PE) fund at S$1.01/share 

  • Innovalues announced a proposed acquisition by Precision Solutions Group (“HoldCo” and “Offeror”), a SPV and indirect wholly-owned subsidiary of Northstar Equity Partners, at an offer price of S$1.01 per share. This implies valuation of 14.2x FY15 P/E/13.3x FY16F P/E, and FY15/16F EV/EBITDA of 9.0x/8.1x. 
  • Past transactions have fetched P/E multiples of 12-16x and 4.8-10.8x EV/EBITDA, while companies with good customer base, regional footprint and operating leverage may command a premium.

Offer price at 30.5% premium over 12-month VWAP up to 6 Apr 16 

  • The Share Scheme price of S$1.01/share is not only close to our DCF-based target price of S$1.03 (WACC:12.9%), but also represents a 30.5% premium over the twelvemonth volume weighted average price (VWAP) up to 6 Apr 16, the date Innovalues first announced a possible transaction, and 18.1% premium over the closing price on 30 Sep 16 (most recent update announcement). 
  • We downgrade the stock from Add to Hold due to limited upside, and recommend that investors take up the offer which we view as fair.

Conditions of the scheme 

  • The Share Scheme requires approvals from majority of Innovalues shareholders, representing not less than 75%, and has received irrevocable undertaking from key management amounting to approximately 39% of total shares. Innovalues CEO and Executive Director will reinvest c.23.9% and 1.6%, respectively, in the new HoldCo, and continue rendering their services. Once the share scheme becomes effective and binding, Innovalues will delist from the SGX.

Prefer the cash option for clean exit 

  • The scheme consideration allows shareholders to elect either: 
    1. S$1.01 in cash, or 
    2. S$0.61 in cash and one HoldCo share at an issue price of S$0.40. 
  • We believe option a) offers investors a clean cash exit opportunity, while option b) may be viable for those who see longer-term potential in Innovalues. 
  • Should a competing offer arise, the offeror has the right to launch a voluntary conditional cash offer with similar or better terms, and conditional upon acceptance level of just over 50%.

3Q16 results in line; with topline growth and margin expansion 

  • Innovalues reported 9M16 topline of S$88.9m, which comprised 70%/71% of our/Bloomberg consensus full-year forecasts. 3Q16 revenue rose 11.5% yoy and 4.4% qoq, driven by growth in both automotive (AU, 12.0% yoy, 2.9% qoq) and office automation (OA, 9.5% yoy, 9.7% qoq) segments. 
  • Gross margin also expanded by 1.3% pts qoq to 32.9% in 3Q16 (9M16: 31.9%). 
  • Excluding FX gains, 9M16 core net profit improved by 14.6% yoy, also in line at 71% of our FY16 forecast.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | 2016-10-26
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 1.03 Same 1.030