Innovalues

Kim Eng on 10 Nov 2014

• 3Q14 above expectations on stronger margins. Confirms our turnaround thesis. Raise FY14E-15E EPS by 3-4%.
• Undervalued growth stock with attractive yields. 24% FY15E EPS growth and ~6% yield at only 8x FY15E EPS.
• BUY with higher TP of SGD0.65 from SGD0.52, now at 12x FY15E EPS instead of 10x. Still below peers’ 13x and undemanding against 22% 3-year EPS CAGR.

Margin surprise
3Q14 profit of SGD4.2m, up 68% YoY and 17% QoQ, exceeded our forecast of SGD3.6m by 15%. The positive surprise was in a 7-ppt YoY and 2.1-ppt QoQ rise in gross margin to 25.6% vs our 23% forecast. We raise FY14E and FY15E EPS by 4% and 3%, respectively. With its turnaround confirmed, we now value the stock at 12x FY15E EPS, up from 10x. This is still below its global peers’ 13x and undemanding against our FY15E-17E EPS CAGR of 22%. TP raised from SGD0.52 to SGD0.65 accordingly. Continue to BUY.

Turnaround confirmed
9M14 profit has already surpassed its FY13 profit. Significant strides have been made. Margins are now much better and could improve further, says management. Financials are also stronger, with net cash of SGD7.5m.

Strong growth prospects ….
We forecast 24% profit growth for next year, fired by: 1) market-share gains within Sensata’s supply base; 2) a new direct relationship with a major branded auto maker; and 3) the start of mass production for new customers pursued in the last two years, for which Innovalues is now fully qualified. We also expect margin upside from productivity measures that are still in progress.
… allied with attractive yields
Stronger earnings growth should not come at the expense of cash flows. Better material management should free up cash. This may be used for dividends, as management has indicated still-low capex of ~SGD5m in FY15E. The stock yields 4-6% for FY14E-15E.