Innotek Limited - CGS-CIMB Research 2020-08-14: Diligent Cost Control


Innotek Limited - Diligent Cost Control

  • InnoTek's 1H20 revenue was in line with our expectations at 50% of our FY20F. However, 1H20 net profit was below expectations at 35% of our FY20F.
  • Despite 11% y-o-y decline in revenue, gross margin declined only 0.9% pt to 21.4% in 1H20 (1H19: 22.3%), thanks to diligent cost controls.
  • Reiterate ADD, lower Target Price as we factor in the 1H20 underperformance.

InnoTek's 1H20 net profit below expectations

  • InnoTek (SGX:M14)'s 1H20 revenue was at 50% of our full-year forecast, in line with our expectations. 1H20 net profit, however, was below our expectations at 35% of our full-year forecast.
  • Despite the 11% y-o-y revenue decline, diligent cost controls helped InnoTek achieved a gross margin of 21.4% in 1H20 vs. 22.3% in 1H19.
  • 1H20 results were also affected by higher interest expenses and fair value losses on investments. 1H20 net profit fell 51.7% y-o-y to S$3.7m. The group remains in a net cash position.
  • No interim dividend was declared. See InnoTek Dividend History.

2H20 outlook

  • On its 2H20 outlook, InnoTek guided that demand for the group’s TV bezel segment is expected to see a steady flow of orders in the second half. In 1H20, demand for the TV segment was stable on the back of increasing demand for home entertainment products, as more people stayed at home during the COVID-19 pandemic.
  • For its office automation segment, it expects demand to remain weak due to the ongoing pandemic.
  • Meanwhile, the domestic automobile market was impacted by the COVID-19 pandemic in 1Q20 but recovered gradually in 2Q20. The China Automobile Manufacturers Association reported that automotive sales in China increased 11.6% y-o-y in Jun. However, InnoTek noted that the overseas automotive markets continue to be impacted by the COVID-19 pandemic. InnoTek expects a gradual recovery for its automotive segment in 2H20.

Reiterate ADD on InnoTek with lower target price

  • We cut InnoTek's FY20-22 EPS by 10-26% as we factor in the higher interest expense. Our reduced target price of S$0.478 is based on a 0.65x FY20F P/BV multiple (previously 0.78x), derived from the Gordon Growth Model (COE: 8.8%, unchanged; ROE: 6.1%, previously 7.0%). We project dividend yields of 3.75% over FY20-22F (assuming Innotek maintains its FY18-19 historical DPS of 1.5 Scts p.a.).
  • See InnoTek Share Price; InnoTek Target Price; InnoTek Analyst Reports; InnoTek Dividend History; InnoTek Announcements; InnoTek Latest News.
  • Downside risks include a deterioration in customer demand due to the escalation of the COVID-19 outbreak.
  • Potential re-rating catalysts are accretive M&As and better-than-expected customer emand.

William TNG CFA CGS-CIMB Research | Caleb PANG Huan Zhong CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-14
SGX Stock Analyst Report ADD MAINTAIN ADD 0.478 DOWN 0.579