|Innotek (S$0.42, unchanged): We initiate on Innotek with a BUY recommendation and a target price of S$0.60 based on FY22F EV/EBITDA of 1.5x, representing a potential upside of 42.9%.
With S$77.4 mln net cash, Innotek’s core business and assets are almost free.
1H22 was the first time in 6 years that the company recorded a biannual loss. This was largely due to externalities such as the lockdown in Shanghai and high price of aluminium and steel.
|• Stock price: 42 cents
• Market cap: S$97 m
• Net cash (end-June 2022): S$77 m
• Expected final dividend: 2 cents/share
With the easing of raw material prices and the recovery of 70% capacity of their Suzhou factory, we expect Innotek to regain productivity in 2H22 and FY23 and record a net profit of S$4.5 mln in 2H22, bringing the full year FY22 net profit to S$2.8 mln and further accelerating to S$12.0 mln in net profit in FY23.
Ramp up of existing business segments. As Covid-19 restrictions ease, automotives, office automation and TV and display orders are expected to recover in the short term. China’s light vehicle output in 2022 demand is driven by Chinese Government’s stimulus measures. Demand for office automation products are expected to recover as workforce returns to office.
CEO Lou Yi Liang, architect of Innotek's turnaround since 2015.
Key customers in the TV and Display segment expected to maintain their market position and competitiveness for large-size and high-end TVs, which in turn, maintains demand for Innotek’s products.
Innotek to pivot to fast growing business segments. Global 5G chipset and global energy storage is set to grow at a compound annual growth rate (CAGR) of 27.0% and 31% respectively through 2030.
Meanwhile, global electric vehicle (EV) will see a CAGR of 29% over the next 10 years and global medical device technologies market is expected to expand at a CAGR of 4.3% from 2021 to 2028.
Innotek will leverage on their track record in steel stamping, tooling design, fabrication and precision machining and to build a strong pipeline of projects and pivot into these new segments, in line with tailwinds provided from the global growth. Accordingly, Management expects the new business segments to initially increase Innotek’s sales by c.10% in FY22 and c.15% in FY23.
Front loaded costs in 1H22, orders secured and production underway in 2H22. To better fulfil orders and expand, Innotek invested heavily into new China, Thailand and Vietnam factories in anticipation of new business ramp up in FY22 and to diversify their manufacturing base.
However, this growth was disrupted by Covid-19 lockdowns, higher cost of raw materials and supply chain disruption and impacted 1H22 earnings, which led to a decline of 57.6% in its share price from its high of S$0.99 in Apr-21.
However, with this disruption priced in and the easing of Covid-19 restrictions, this situation might potentially reverse as Innotek begins to recognize revenue at the backdrop of newly secured orders and resumption of production. Cost of materials (steel and aluminium) had also declined significantly from its peak, which will
likely boost margins.
Dividend had been on a steady uptrend, improving from 0.5 Scts in FY17 to 2 Scts in FY20. Due to their huge cash pile, Innotek stands to benefit from a high interest rate environment, yield curve inversion and short term fixed deposits.
We expect operating cash flow in 2H22 to improve significantly due to resumption of operating activities and Innotek to be able to maintain dividend payout of 2 Scts in FY22.
Strong USD in Innotek’s favour. Innotek’s major costs were paid out in Chinese Yuan (CNY) and Thai Baht (THB) while more than half of their revenue was received in United States Dollar (USD). As USD strengthened against THB and CNY by 8.4% and 12.6% respectively YTD, we expect Innotek to benefi t from margin expansion and realised gains.
Strong management team. The management team led by CEO and Non-Independent Director Lou Yiliang had greatly impacted Innotek since he came onboard at the end of FY15. Lou implemented radical restructuring initiatives to boost productivity and profitability, including an incentive scheme which rewarded employees based on units produced per day and production yield.
As a result, InnoTek managed to turn from a loss-making company in FY15 to a profitable company ever since. Innotek’s gross margins increased from 6.5% in FY15 to 19.4% in FY21, resilient even amidst the Covid-19 pandemic. Notably, Chairman Neal Chandaria’s family, “the Chandaria family” is also a major shareholder and founding member of Venture Corp.
|At S$0.42, Innotek is capitalised at S$97.4 mln, PB 0.5x, ex-cash PE 7.1x, dividend yield of 4.8% and EV/EBITDA 1.0x.
Innotek is currently trading at distressed valuations.
Forward EV/EBITDA and forward PE stands at 1.0x/8.1x, 87.5%/11.0% discount to its industry peers.