Innovalues (IP SP) - Maybank Kim Eng 2016-10-26: Good Progress Made

INNOVALUES LIMITED 591.SI

Innovalues (IP SP) - Good Progress Made

Innovalues continued to deliver on its earlier guidance of a strengthening business. 3Q16 was in line; we maintain our full-year forecast and TP of SGD1.15 (13.5x FY17E P/E, 10% below peer average).
We see revenue growth accelerating on growing beneficial trends toward stricter regulation of vehicular safety & control, energy savings, and environmental protection, while cost controls in the form of greater automation should drive margin upside.

The stock offers good value at 11x P/E and 4% yield. M&A, if it comes, will be a bonus.

3Q16 revenue/core NP rose 11.5%/56% YoY, excluding the impact of very substantial FX gains that occurred in 3Q15 (SGD3.1m 3Q15 vs SGD0.3m in 3Q16).
With sales comfortably exceeding SGD30m for the quarter, GP margin shot up 4.5ppt YoY and 1.3ppt QoQ to 32.9% on higher operating leverage; we had expected 32.7% for the full year.
The main driver was automotive (78% of 3Q revenue), which was +12% YoY on broad based customer contributions in its second sequential quarter of improvement.

Simultaneously, major customer Sensata also announced robust 3Q results, which showed the same trends; namely, sequential revenue and margin improvement.
Full-year guidance was maintained, while growing M&A synergies are setting up the runway for Sensata’s longer-term growth, especially in China where the acquisition of Schrader in 2014 is expected to allow it to tap into fast-riding OEM and aftermarket demand for tyre pressure monitoring sensors.

Finally, we still think Innovalues will make a good acquisition candidate for the right buyer. In our view, it will make a good fit for automotive-oriented PE funds or industry buyers looking to take advantage of trends toward stricter regulation in vehicular safety/control, energy saving and environmental protection.
Based on our analysis, we see takeout offers in the range of SGD1.00-1.20 (9-11x FY15 EV/EBITDA), which should be acceptable to the market.

Gregory Yap CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-10-26

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