InnoTek - UOB Kay Hian 2020-11-12: Riding On China’s Auto Sales Recovery & High TV Demand

INNOTEK LIMITED (SGX:M14)

InnoTek - Riding On China’s Auto Sales Recovery & High TV Demand

InnoTek (SGX:M14), which has a huge exposure to China’s auto market, is a precision metal components manufacturer serving the automobile, TV and office automation industries. It is set to benefit from:
1. China’s auto sales recovery; and
2. COVID-19 social distancing measures which have boosted demand for large screen TVs.
We expect InnoTek's earnings to grow by 229% h-o-h in 2H20 and 19.4% y-o-y in 2021. InnoTek has a net cash position of S$73m.
We initiate coverage on InnoTek with BUY and PE-based target price of S$0.82.

China has successfully contained COVID-19 and eased most of its social distancing measures. This has led to a surge in passenger vehicle (PV) sales back to pre- COVID-19 levels. InnoTek, which has large exposure to China’s automobile market (historically accounted for 30% of annual revenue), is set to benefit from 2H20 onwards.
Due to the social distancing measures, its TV panel segment is enjoying strong demand for large TV screens used for virtual meetings, online education and entertainment at home. With the surging demand, we reckon that the automobile and TV panels segments will drive earnings from 2H20.

InnoTek’s new CEO and Non-Independent Director Lou Yiliang (who joined in end-15) implemented several restructuring initiatives to boost profitability, including an incentive scheme which rewards employees based on units produced per day and production yield. As a result, InnoTek managed to turn from a net loss of S$16.3m in 2015 to decade-high annual net profits of S$20.2m/S$16.7m in 2018/19 respectively.
Meanwhile, its gross margins had also increased from 6.5% in 2015 to 21.8% in 2019. As such, InnoTek has become more resilient during economic downturns due to the initiatives.
The track record of the major shareholder, the Chandaria family who is involved in the founding of Venture Corporation (Venture), has been underappreciated by the market. Mr Neal Chandaria has been the Chairman since 2017 to date, during which InnoTek has seen its most profitable years.

As of end-1H20, InnoTek has a net cash position of S$72.9m, up S$37.9m (+108%) from end-15, forming 60% of its current market capitalisation.
Supported by its large cash war chest, InnoTek has been paying out a dividend of 0.5 cents since 2016 and gradually increased it to 1.5 cents in 2019. See InnoTek's Dividend History.

According to our forecasts, strong contributions from InnoTek’s automobiles and TV panels segments will help boost revenue for the rest of 2020 due to robust COVID-19-induced demand, before gradually increasing in 2021-22.

Despite strong and resilient contributions from its automobile and TV panels segments, we expect InnoTek's total revenue to decrease 3.2% y-o-y in 2020 to S$180.8m, dragged down by the underperformance from the office automation segment. However, for 2021 and 2022, we forecast InnoTek's total annual revenues of S$186.9m (+3.3% y-o-y) and S$200.3m (+3.3% y-o-y) respectively, implying a modest revenue CAGR of 2.4% for 2020-22.

We forecast a slight fall in InnoTek's net profit to S$16.0m for 2020 (-0.8% y-o-y), before a strong upswing to S$19.1m (+15.6% y-o-y) and S$22.9m (+11.8% y-o-y) for 2021-22 respectively, implying net margins of 8.9-11.4% and a CAGR of 11.2% for 2020-22.

Initiate coverage on InnoTek with BUY and PE-based target price of S$0.82, based on a 9.8x 2021F PE, pegged to a 5% discount to average peer mean of 10.3x 2021F PE.
InnoTek's share price is currently trading at 6.3x 2021F PE (ex-cash PE of 2.5x), which is unjustified based on its resilient business model, high net cash position and high margins as compared to its peers’.
Thus, we believe that InnoTek should be trading nearer to its regional peers’ multiple of 10.3x 2021F PE.
Risks include demand disruption from COVID-19, competition and adverse regulatory changes.
See InnoTek Share Price; InnoTek Target Price; InnoTek Analyst Reports; InnoTek Dividend History; InnoTek Announcements; InnoTek Latest News.

Catalysts to InnoTek Share Price:
- Recovery in the office automation segment.
- Better-than-expected demand from TV panels and automobiles segments.

Llelleythan Tan UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-12

SGX Stock Analyst Report BUY INITIATE BUY 0.82 SAME 0.82