|Innotek hasn't had analyst coverage for a long time. CGS-CIMB has just decided to initiate coverage of the stock that is viewed as a value stock by some investors. High cashpile + decent dividend yield + free cashflow positive. Read on ...|
Excerpts from CGS-CIMB report
Analyst: William Tng, CFA
|Precision component maker
■ We forecast prospective dividend yields of 3.95% over FY20-22F which are backed by its strong net cash balance sheet.
■ Accretive M&A are upside share price catalysts.
Established precision component supplier
Mainboard-listed Innotek Limited (Innotek) is a precision metal component manufacturer serving the consumer electronics (TV and display), office automation (OA) and automotive industries.
The group has five manufacturing facilities in China and one in Thailand as at end Dec-2019.
Strong balance sheet
In our view, Innotek has a strong balance sheet — it has been in a net cash position for the past five years.
From a S$34.9m net cash (including marketable securities) balance in FY15, Innotek’s net cash (including marketable securities) balance has grown to S$69.3m as at end Dec-2019.
As a percentage of market cap, net cash (including marketable securities) as at end Dec-2019 accounted for 80.6% of its market cap.
Dividend payments have resumed
1.5 cents dividend?
"For dividends, our base case assumption is that the company will pay 1.5 Scts DPS for FY20-22F, similar to the DPS for both FY18-19. While Innotek has the cash to pay a higher dividend, we believe the company will likely adopt a cautious stance given the uncertain business environment."
-- William Tng, CFA (photo),
Innotek has been free cash flow (FCF) positive since FY16.
The company did not pay any dividends in FY15 as the group recorded a loss of S$16.3m that year and chose to be prudent in not paying a dividend.
Innotek resumed its dividend payments in FY16 with a DPS of 0.5 Scts.
DPS was raised to 1.0 Scts in FY17 and 1.5 Scts for FY18, and maintained at 1.5 Scts for FY19.
The company does not have a formal dividend policy.
Key risks include:
|a) a deterioration in customer demand due to the escalation of the Covid-19 outbreak;
b) foreign exchange exposure risk (Innotek hedges its exchange rate exposure where appropriate), and
c) negative impact from the US-China trade war.
|Initiate with Add
We initiate coverage of Innotek with an Add recommendation and a target price of S$0.579.
Our target price is based on a 0.78x FY20F P/BV multiple, derived from the Gordon Growth Model (COE: 8.8%; ROE: 7.0%).
We project dividend yields over FY20- 22F of 3.95% (assuming Innotek maintains its FY18-19 historical DPS of 1.5 Scts per annum)
Downside risks include a deterioration in customer demand due to the escalation of the Covid-19 outbreak.
Re-rating catalysts are accretive M&A and better-than-expected customer demand.
Full report here.