Excerpts from analysts' report

CIMB analysts: William Tng, CFA, & Ngoh Yi Sin

plant1.16Innovalues' plant in Pasir Gudang, Johor.
All photos by Tok Chong Yap.
■ Visited Innovalues’ plant in Malaysia, which is its largest and houses both AU and OA operations.

■ Continued investments in equipment and processes to help retain competitive edge. 

analysts1.16■ Superior surface treatment capabilities may bring more business opportunities. 

■ An attractive M&A target in the midst of privatisation plays of similar firms.

■ Maintain Add with DCF-derived TP of S$0.93; FY15-17 dividend yields of 4.1-5.6%.

machine1.16There are more than 150 CNC machines for its automotive segment.Attended plant visit in Malaysia
We visited Innovalues’ operations in Malaysia recently. This is the largest and only plant to house both automotive (AU) and office automation (OA) production. Innovalues’ other plants are in Thailand and China.

This plant not only recently saw the relocation of OA operations from China, but is also often the test bed for new process implementation.

peer1.16Quality control: Visual inspection of all products to ensure they are in accordance with customers’ requirements. (Picture below too)Machine customisation helps to achieve better margins
During the trip, we saw over 150 CNC machines (mainly Japanese brands), whose average age ranges from 3-4 years old, dedicated to AU operations.

While some parts and processes have been customised to improve efficiency, Innovalues continues to invest in newer but not overly expensive technology.

We see scope for further costsavings, especially in the final inspection phase that is currently still labour-intensive.

check1.16One-stop solutions provider with surface treatment services
Unlike most competitors who outsource their surface treatment services, Innovalues offers in-house plating and surface finishing services for all printer rollers under the OA segment and 30% of its AU parts.

These superior surface treatment capabilities (patentbacked) could set the company apart from the rest (current utilisation rate below 40%).

screen1.163-dimensional inspection to ensure exact dimensions of each and every component manufactured.Privatisation plays in the region on the rise
In 2016, we continue to see privatisation plays in the region. Interplex Holdings (INTX SP, Not rated), a leading global precision engineering company, was offered S$0.82/shr by Baring Asia PE fund.

IPE Group (HK 0929, Not rated), a similar high precision metal component manufacturer, was offered HK$1.5/shr by Baoan Technology Company, translating into 14.2x P/E and representing a premium of 36.4% over the last closing price.

jigging1.16Part of the surface treatment services – The surface area that needs to be anodised or painted must be firmly fixed to aluminium jigs to provide passage of electric current and good contact must be maintained.Innovalues: an attractive M&A target?
Besides longstanding business relationships with key clients like Sensata and Hilite International, Innovalues also boasts strong precision engineering capabilities that generate superior margins (GPM of 28-30%).

Its strong cash-generating ability and earnings growth momentum could warrant a premium vis-à-vis its peers.

tubes1.16Samples of some of the components after they have been anodised and coatedReiterate Add
We remain positive on the long-term outlook of Innovalues in view of the secular growth trend of increasing sensor usage in cars globally. Key risk in the near-term is order delay or cancellation from customers.

We maintain our Add call and DCF-based target price of S$0.93 (WACC: 12.9%), with forecasted FY15-17 dividend yields of 4.1-5.6%.

Full report here.

fix1.16Snapshot of the manufacturing process of office automation – printer roller assemblybrief1.16Innovalues CEO Goh Leng Tse (far right) in a discussion with analysts.



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