gsg_stock discussion

Stockwatch- Innovalues Precision (Singapore) S$0.855

I have been following Innovalues Precision with interest in recent weeks as I am looking for outperformers in the manufacturing sector which has been a laggard in the recent market rallies. Innovalues come to my mind as I noted with interest that Lion Capital become a substantial shareholder. And with a recent plant visit, with analysts raising their target price, Innovalues broke out of its trading range.

And on receiving this week's The Edge Singapore, I read an interesting articles on Innovalues. After reading it, I made up my mind Innovalue is really worth watching.

Highlights of the article on Innovalues Precision on this week's The Edge Singapore:

1. Lion Capital has a 6.03% stake in Innovalues.

2. Innovalues has made a profitable shift to manufacturing components for the automobile industry from the traditional office automation (OA) industry.

3. Several US and European automotive component manufacturers have been outsourcing work to Asia. Innovalues has been able to ride this boom.

4. Innovalues looks forward to winning new customers as automobile companies increase emphasis on safety and seek out more safety components for their cars. And Innovalues founder and CEO Goh Leng Tse hopes turnover from automotive will overtake OA to make up 50% of total revenues by 2008.

5. Innovalues currently produces 3 components for Sensata Technologies, a former unit of Texas Instruments:

(Website of Sensata Technologies- http://www.sensata.com/about/index.htm)

i. Braking sensors- provide enhanced safety features, especially for nagivating along winding roads; so far used only in luxury cars in Europe, but which will be used in luxury and mass market cars in the US by next year. Strong growth expected in this component. Innovalues manufactures it out of its Malaysian plants.

ii. Occupant weight sensors- Occupant weight sensors measure the weight of an occupant. An advanced air bag system might use this information to prevent the air bag from deploying at all in the presence of children. The Federal Motor Safety 208 rule in the US made it mandatory this year for all passenger cars to have an advanced airbag deployment system based on the physical weight of passengers to increase the level of protection. Demand is therefore growing. Innovalues currently manufactures 95% of the components used in these sensors at its Thailand plant on behalf of Texas Instruments.

iii. Automotive pressure transducer (APT) sensors- activate the fan in the car according to temparature changes. Innovalues started the production of APT sensors at its China plant under a pilot programme by Texas Instruments in May. Currently, the bulk of these sensors are still being produced by other manufacturers in Japan and Mexico. But production would eventually be entirely relocated in China. Innovalues may garner a bigger order book as worldwide demand for APT sensors is expected to reach 70 mil units this year.

6. Apart from Texas Instruments, Innovalues has also secured new automotive component manufacturing customers like:

i. Siemens VDO (fuel injector) - after trial runs for Siemens VDO diesel engine fuel injector components, mass production is expected to start at the end of Oct 2006. In CIMB research report, it states that Siemens could become a major customer of innovalues' Malaysian operations as the company is in talks for more projects.

ii. Bosch (fuel pump)

iii. HILITE International (engine valve and transmission valve)

iv. LUK (clutch disc)- production is expected to start next year for LUK's clutch discs, which would be used in General Motors, Audi and BMW cars.

7. Despite growth potential in automotives, Innovalues is not scaling down its OA business.

i. Goh says the company is in talks with a major printer customer to manufacture laser printer shafts. If successful, this potential customers could contribute 20% to Innovalues' total OA revenues next year.

ii. Innovalues has also benefited from Hewlett-Packard's recent volume growth- 15% y-o-y between May and July. As a result, it has widened its product offerings to HP to include components for wide-format printers, the production of which HP is gradually moving away from Europe to Asia.

8. Innovalues' Malaysia and China plants are running at almost full capacity, but the existing Thailand plant, which produces mostly automotive and hard disk drive (HDD) components and represents about 20% of total group capacity, is operating at about 80%.

9. (Negatives and risks) Innovalues' HDD business and therefore its HDD production in its Thailand plants has been impacted by a decision by a key HDD customer, Minebea, to allocate more production in-house following a management reshuffle last October. Previously, Minebea outsources 75% of the production to Innovalues but has since reduced this to 70% this year. And the volume could drop further.

10. While CIMB analyst says Innovalues may no longer focus on this area but will increase its focus on the stable automotive components sector, Goh says Innovalues is in talks with a potential HDD customer who could invest US$200 mil to develop the business regionally. If things go as planned, this would provide Innovalues an opportunity to deal directly with a HDD original equipment manufacturer. For now, the weakness in the Thailand plant has been partially compensated for by a surge in the automotive components business as volume for occupant weight sensors remains robust.

11. Capex. Innovalues has budgeted for a total of $16.5 million in capital expenditure, up from $15.8 million in 2005. It will be financed through internal funds and bank borrowings. To date, it has spend $7 mil this year.

12. Its second plant in Thailand, which is under construction, is on track to commence production in 4Q2007. This plant will triple its production floor area in Thailand from 41,000 sq ft to 108,000 sq ft.

13. Innovalues will also expand its China facilities from 88,000 sq ft to 161,000 sq ft next year to support rising demand.

posted by gsg @ 11:26 AM