InnoTek Limited ($0.475)

• Its revenue increased 7.6% year-on-year to S$186.8 million for the year ended 31 December 2022 (FY’22) despite a challenging operating environment, and maintained a first and final dividend of 2.0 Singapore cents per share, giving a yield of 4.2%.

• 2H profit was flattish yoy at $4 million, but turned around from 1H’s loss of $2 million, reflecting improved operating conditions and more favourable forex and raw material costs. 

Innotek recorded improved performance in the Group’s Automotive and Office Automation (“OA”) business segments, boosting the top line for the six months ended 31 December 2022 (2H’22) to S$102.3 million, 14.6% higher than S$89.3 million in 2H’21.

The OA segment recovered strongly as supply chain disruptions eased, resulting in higher sales from key customers in China and Thailand. Revenue for the segment’s parts assembly business also increased, reflecting the success of the Group’s efforts to move up the value chain.

Electric vehicle boost
"Pent-up demand in China is expected to boost recovery in the Group’s Auto segment; meanwhile, the Group intends to ride the growing adoption of Electric Vehicles (“EVs”) to offer its precision stamping expertise and become a strategic partner for key EV customers."

Meanwhile, the Auto business benefited from stimulus policies implemented in China and higher orders from customers making up for lost production time during COVID-related lockdowns.

Growth was partially mitigated by weaker demand overseas as well as in the Chinese commercial vehicle market.

The top line improvement for 2H’22 and FY’22 was partially offset by lower turnover in the TV and Display segment, mainly due to dampened consumer sentiment amid the Russia-Ukraine conflict, high inflation in Europe and USA, as well as an oversupply in the European TV industry.

The Group also recorded improved performance in the gaming machine and medical device businesses, partially offset by slower-than-expected progress in other businesses such as 5G servers.

Looking ahead, business momentum is largely expected to improve, as the country lifted its “Dynamic Zero” COVID policy in January 2023.

However, the Group is closely monitoring several headwinds such as fluctuating export demand, soft domestic demand, further disruptions to the global supply chain due to the prolonged Russia-Ukraine war, and elevated levels of inflation.

7th consecutive quarter of profit
Lou Innotek

“InnoTek has closed its seventh consecutive year of profitability, underscoring our resilience in the face of numerous challenges.”

-- Lou Yiliang,
CEO,  InnoTek

Pent-up demand in China is expected to boost recovery in the Group’s Auto segment; meanwhile, the Group intends to ride the growing adoption of Electric Vehicles (“EVs”) to offer its precision stamping expertise and become a strategic partner for key EV customers.

For the OA segment, the Group expects a near- to medium-term slowdown, amid waning recovery and a shift in market demand 
from China into Southeast Asia.

In response, the Group is expanding into parts assembly, compared to single-piece manufacturing. For the TV and Display segment, short-term demand is expected to be impacted by softer Europe and American markets.

The Group remains confident its key customers will maintain market share in the high-end TV market and is focusing on improving technical capability, upgrading the Group’s products and implementing cost-control measures to meet long-term demand.

The Group continues using its internal resources to strengthen production capabilities in its manufacturing facilities in Rayong, Thailand, which has steadily increased production of OA and Auto products, as well as Bac Ninh, Vietnam, which has commenced the production of bespoke-design heatsinks for a TV customer and will start the production of TV bezels in the first quarter of 2023.

Meanwhile, the Group will continue its plan to diversify into emerging industries and establish partnerships in the medical devices, 5G servers, and gaming machine sectors.

These partnerships are expected to bear fruit in the coming months and will contribute to financial performance from FY’23.

 2023 turnaround year 
Innotek’s full year profit of $2.3 million came in marginally lower than our forecast of $2.8 million, but we believe the 2023 will continue to be a robust turnaround year for them.

We are expecting 2023 profit to come in at $12 million, giving a forward PE of 9x.

Net cash of $78 million represents 71% of its market cap of $110 million. Dividend of 2 cents implies a yield of 4.2% while P/B ratio is 0.6x.

We maintain our “Accumulate” recommendation on Innotek.


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