Innotek Limited - CIMB Research 2018-01-09: Restructuring To Stay Ahead

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INNOTEK LIMITED M14.SI

Innotek Limited - Restructuring To Stay Ahead

• InnoTek is a precision metal components manufacturer serving the consumer electronics, office automation and automotive industries.
• Its stamped components are used in printers and copiers, TVs and cars. Its end-customers include Sony, Canon, Ricoh, Continental, Imasen, Kyocera, Konka, Innolux and Wistron.
• Restructuring efforts over the years and a change in management has led to the return to positive net profit since 2Q16.
• InnoTek is trading at a historical (end-Sep 2017) P/BV of 0.66x. The company resumed paying dividends in FY16.

Company description 

• Mainboard-listed InnoTek Limited (Innotek) is a precision metal components manufacturer serving the consumer electronics, office automation and automotive industries. With five manufacturing facilities in China, the group’s wholly-owned subsidiary, Mansfield Manufacturing Company Limited, provides precision metal stamping, commercial tool and die fabrication and sub-assembly work to Japanese and European end-customers. 
• Its stamped components are used in printers and copiers, TV frames, bezels, chassis frames and in car seat frames, guide rails, exhaust system. Its end-customers include Sony Corp (6758 JP, Not Rated), Canon Inc (7751 JP, Not Rated), Ricoh Corp (7752 JP, Not Rated), Continental AG (CON GY, Not Rated), Imasen Electric Industrial Co (7266 JP, Not Rated), Kyocera Corp (6971 JP, Not Rated), Konka Group (000016 CH, Not Rated), Innolux Corp (3481 TT, Not Rated) and Wistron Corp (3231 TT, Not Rated).

What has changed? 

• InnoTek’s revenue in FY12 fell to a low of S$259m versus S$416m in FY10. The Group reported a net profit of S$536,000 in FY11 and slipped into a net loss of S$18.4m in FY12. FY12 losses were due to a combination of lower revenue arising from the political tension between China and Japan as well as commencement of restructuring and consolidation efforts by InnoTek to combat the revenue decline.
• In FY14, InnoTek’s restructuring efforts continued as Japanese office automation customers shifted their production base to lower cost countries such as Vietnam. Managing Director, Mr Yong Kok Hoon, also stepped down to pursue other career opportunities.
• On 2 Nov 2015, Mr Lou Yiliang was appointed Executive Director of the Group and CEO of Mansfield. Mr Lou has significant experience in the consumer electronics and home appliances business in Asia. Mr Lou’s strategy was:
  1. to further drive cost efficiencies;
  2. to improve the group’s skill sets and use of technology, noting that the group had fallen behind peers in capabilities such as mould making, machining and line management skills, and
  3. to personally drive customer engagement efforts.
• On 1 Mar 2017, Mr Lou was appointed CEO of InnoTek. Mr Lou has been purchasing shares from the open market over April to July 2016. 
• On 27 Apr 2017, Mr Neal M. Chandria was appointed Chairman of the Board of Directors. InnoTek also announced plans to build a new factory in Thailand to support an office automation customer. The plant is scheduled to be ready in 1H18 and management expects revenue contribution to commence in 2H18. 
• On 11 Oct 2017, InnoTek also announced the incorporation of a subsidiary, Mansfield Technology (Weihai) Co Ltd to support Hewlett-Packard’s newly-acquired Samsung Printer business.

Management’s plans 

• In the printing & imaging segment, InnoTek believes its Mansfield Weihai subsidiary will benefit from supporting Hewlett-Packard’s printer business (via the Samsung printer business acquisition). Mansfield Weihai will be involved in the R&D, design and manufacturing of precision metal stamping and tooling.
• For the office automation business, management expects its new Thailand plant to commence production in 2H18F and gather momentum in FY19F onwards.
• In the automotive segment, InnoTek plans to pursue more programmes and orders for car seat moulds and stamped products. It plans to expand into the children’s car seat segment, according to management.
• In the TV segment, InnoTek reported that the market response for its aluminum heat sink for TVs has been positive. InnoTek expects the TV segment to remain a significant revenue contributor given growing consumer demand for high-definition TV panels with thin but strong bezels.

9M17 financials 

• 9M17 revenue fell 1.7% yoy to S$156.6m due to lower revenue from the office automation segment. Gross profit margin rose 0.9 % points to 18.9% due to lower headcount and lower depreciation arising from the disposal of old equipment in FY16A. Net profit rose 3.8% yoy to S$7.1m.
• By manufacturing activity, metal stamping accounted for 62% of 9M17 revenue, precision machining accounted for 31% while Tooling accounted for the remaining 7%. 
• In terms of product segment, flat-screen TVs accounted for 37% of 9M17 revenue, printing and imaging accounted for 34%, automotive accounted for 27%.

Historical valuation 

• As at end-Sep 2017, Innotek’s BVPS was S$0.575. Based on its share price of S$0.385 on 5 Jan 2018, its historical end-Sep 2017 P/BV is 0.66x. 
• As at end-Sep 2017, InnoTek’s net cash position was S$31.9m.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2018-01-09

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* This Eyes On the Ground report represents a preliminary assessment of the subject company, and does not represent initiation into CIMB's coverage universe. It does not carry investment ratings and CIMB does not commit to regular updates on an ongoing basis.