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

Innovalues (IP SP) - Maybank Kim Eng 2016-10-26: Good Progress Made INNOVALUES LIMITED 591.SI

Innovalues (IP SP) - Good Progress Made

3Q16 results in line; BUY and TP maintained 

  • 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.

Core growth sparks into second sequential quarter 

  • 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.

Major customer Sensata’s robust 3Q bodes well 

  • 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.

M&A will be a bonus, if it happens 

  • 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
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.15 Same 1.150