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UOB Kay Hian starts InnoTek at 'buy' on exposure to China’s auto market and high TV demand

Felicia Tan
Felicia Tan11/16/2020 04:38 PM GMT+08  • 3 min read
UOB Kay Hian starts InnoTek at 'buy' on exposure to China’s auto market and high TV demand
InnoTek is currently trading at 6.3x 2021F PE (ex-cash PE of 2.5x), which is unjustified based on several factors: UOB analysts.
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UOB Kay Hian analysts Llelleythan Tan and John Cheong have initiated coverage on InnoTek with a “buy” call and price-to-earnings (PE) based target price of 82 cents, representing a 54.5% upside on its last-traded share price of 53.5 cents.

The Mainboard-listed precision metal parts manufacturer, which serves the automobile, TV and office automation industries, has a huge exposure to the Chinese market, and looks set to benefit from the recovery in China’s auto sales and robust TV demand due to Covid-19.

“According to our forecasts, strong contributions from InnoTek’s automobiles and TV panels segment will help boost revenue for the rest of FY20 due to robust COVID-19- induced demand, before gradually increasing in 2021-22,” say the analysts.

On that, Tan and Cheong “expect 2HFY2020 earnings per share (EPS) to grow by 229% h-o-h and 19.4% y-o-y in 2021”.

“Factoring in strong and resilient contributions from its automobile and TV panels segment, we expect total revenue to decrease -3.2% y-o-y in 2020 to $180.8 million, dragged down by the underperformance from the office automation segment,” they add.

“However, for 2021 and 2022, we forecast total annual revenues of $186.9 million (+3.3% y-o-y) and $200.3 million (+3.3% y-o-y) respectively, implying a modest revenue compound annual growth rate (CAGR) of 2.4% for 2020-22.”

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To date, InnoTek has a strong balance sheet with net cash position of $72.9 million. This is up 108% from end-FY2015, forming some 60% of its current market capitalisation.

“Supported by its large cash war chest, InnoTek has been paying out a distribution per share (DPS) of 0.5 cents since 2016 and gradually increased it to 1.5 cents in 2019,” say Tan and Cheong.

The analysts are also positive on InnoTek’s successful restructuring initiatives by its new CEO and non-independent director Lou Yiliang, who joined in end 2015.

The initiatives, which were aimed at boosting the company’s profitability, includes an incentive scheme which rewards employees based on the number of units produced per day and production yield.

Due to Lou’s initiatives, InnoTek managed to turn from a net loss of $16.3 million in 2015 to decade-high annual net profits of $20.2 million and $16.7 million in 2018 and 2019 respectively.

Its gross margins had also improved to 21.8% in 2019 from 6.5% in 2015, which enabled the company to become more resilient during economic downturns.

See:CGS-CIMB reduces Innotek’s earnings per share on higher interest expenses in 1H20

The company’s strong major shareholder backing is also a plus.

“The track record of the major shareholder, the Chandaria family who is involved in the founding of Venture Corporation (Venture), has been underappreciated by the market. Mr Neal Chandaria has been the chairman since 2017 to date, during which InnoTek has seen its most profitable years,” say Tan and Cheong.

“InnoTek is currently trading at 6.3x 2021F PE (ex-cash PE of 2.5x), which is unjustified based on its resilient business model, high net cash position and high margins as compared to its peers,” they add.

“We believe that InnoTek should be trading nearer to its regional peers’ multiple of 10.3x 2021F PE. Risks include demand disruption from COVID-19, competition and adverse regulatory changes.”

As at 4.37pm, shares in InnoTek are trading flat at 53.5 cents.

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