20151005-Maybank_KERPL-INNOVALUES__IP.SP_VW_OPENS_UP_VALUE_WINDOW_13页_638kb

Innovalues (IP SP) Summary

Core Content

Innovalues is a Singapore-based technology company with a market capitalization of USD146M and an average daily trading volume of USD0.6M. The current share price is SGD0.65, with a target price of SGD1.02 (+58% increase), and the recommendation remains BUY. The target price has been reduced from SGD1.18 due to a drop in peer average valuations from 14x to 12x.

Key Information

• Share Price: SGD0.65
• Target Price: SGD1.02 (+58%)
• Market Cap (USD): 146M
• ADTV (USD): 0.6M
• Country: Singapore
• Industry: Technology
• Recommendation: BUY (unchanged)

What's New

• The Volkswagen (VW) emission scandal has affected global auto valuations, including those of Innovalues.
• Innovalues is not directly affected by the scandal, as its business with VW accounts for less than 1% of revenue, mainly through Hilite.
• The scandal may have indirect implications, as regulators are clamping down on the entire auto industry, potentially increasing demand for hardware sensors to monitor emissions more effectively.

What's Our View

• Despite the scandal, we remain positive on Innovalues, as its share price has retreated 30% from its peak, opening up a buying opportunity.
• Valuations have dropped to 7x FY16 EPS and a 5.6% dividend yield.
• The longer-term outlook is positive, as the scandal may drive demand for hardware sensors, which could benefit Innovalues through its supply of CPOS metal housing to Sensata.
• We maintain our FY15 and FY16 EPS forecasts and expect a rebound in 4Q15, with revenue of SGD30m (+11% YoY) and net profit of SGD6.1m (+12% YoY).

2H15 Outlook

• 3Q15 Revenue: Likely to be softer due to weaker automotive sales, but we expect a 32% YoY improvement to SGD5.5m, driven by better margins and FX gains.
• 3Q15 Earnings: Expected to benefit from better margins and FX gains, with a YoY growth in earnings.
• 4Q15 Outlook: High confidence in a rebound, with revenue and earnings expected to rise significantly.
• 3Q15 Cash Flow: Projected to be better due to a delay in capital expenditures, leading to an estimated SGD57m in end-FY16 cash, up from SGD54m.
• Special Dividend: We expect a special dividend this year, potentially repeating or improving on the 0.8ct special DPS in FY14.

Key Metrics

Exposure to VW

• Direct Exposure: Minimal, accounting for less than 1% of revenue, mainly through Hilite for petrol engines and transmission systems.
• Indirect Exposure: Potential risks from regulatory actions, but the impact is expected to be limited unless the scandal affects the broader auto industry.
• CPOS Contribution: Innovalues supplies metal housing parts for Sensata's CPOS, which could lead to increased demand in the long term due to the need for more hardware sensors.

Valuations

• TP Reduced: From SGD1.18 to SGD1.02 due to lower peer valuations.
• Peer Valuation: Innovalues is now valued at 12x FY16 P/E, on par with its peers.

Appendix 1: Regulatory Reactions

• Australia: Investigating VW's emissions claims.
• Britain: Testing for banned software.
• Canada: Investigating 100,000 diesel cars and testing all diesel passenger cars.
• Czech Republic: Monitoring the situation in Europe.
• European Union: Urging investigations and strict enforcement.
• France: Testing vehicles for banned software.
• Germany: Investigating emissions manipulations and sending a committee to VW.
• Italy: Testing 1,000 cars and expanding the probe.
• Mexico: Checking for compliance with emissions standards.
• Netherlands: Testing in Germany, no separate tests planned.
• South Korea: Investigating 4,000-5,000 VW vehicles.
• Spain: Requesting repayment of subsidies.
• Sweden: Considering extra rigorous checks.
• Switzerland: Banning affected VW cars.
• USA: Retesting all diesel passenger cars with real-world testing.

Conclusion

Innovalues is a technology company with a strong position in the automotive industry, particularly through its supply of components to Sensata. While the VW emission scandal has impacted global auto valuations, the direct effect on Innovalues is minimal. However, the scandal may lead to increased demand for hardware sensors, which could benefit Innovalues. The company is expected to rebound in 4Q15 and maintain growth in FY16, with improved margins and FX gains. The target price has been adjusted to reflect current peer valuations, and we maintain our BUY recommendation.