gsg_stock discussion

Stockwatch- Innovalues Precision (Singapore) CIMB report 28 Nov 2006

Innovalues Precision Ltd
Outperform Target Price= S$ 1.52

On course for record earnings

• Company is on track to achieve our full-year figures. Our recent conversations with the company suggest that it is on track to attain our forecasts and hit record earnings this year, driven by continuous strength in the automotive and OA segments. The only weakness is the HDD component business.

• Both Malaysia and China facilities are still operating at full capacity. The Malaysia plants are busy with printer-related and automotive programmes, while the China plant is boosted by the automotive business. Utilisation rate for the Thailand plant, on the other hand, continued to hover at about 80% due to a slowdown in the HDD components business.

• Maintain Outperform with unchanged target price of S$1.52. We have kept our FY06 numbers. Our FY07-08 numbers are also intact, though we believe there could be upside surprises if the entire automotive components business takes off as planned. Our target P/E of 13x CY07 earnings, translating into a S$1.52 target price offering 79% upside, is pegged at a slight premium to its historical average P/E in view of its healthy 34% earnings CAGR projected for FY05-08. Maintain Outperform, and we see catalysts from a solid set of full-year results (to be announced by end-Feb 07).

Record earnings within reach

Malaysia operating at full capacity.
The Malaysia plants are still operating at full capacity in 4Q06, underpinned by robust demand for printer-related and automotive products. In the OA segment, we believe Innovalues, being one of the largest printer shaft and rubber roller suppliers for Hewlett Packard’s (HP) inkjet printers, has benefited from the latter’s marketshare gains. HP recently reported a second consecutive quarter of double-digit hardware volume growth (up 17% yoy during August-October; 15% yoy growth in the previous quarter). It will also start to support HP’s wide-format printers, which are programmes HP is gradually transferring from Europe to Asia in a bid to lower its production costs. Mass production is expected to begin 2Q07, a slight delay from end-2006. Additionally, demand from the new customer (a major player in the printer business) for laser toner cartridge shafts remains very strong, and Innovalues has not been able to fully fulfil the customer’s request at this moment due to constraints in capacity. As such, the group is accelerating its expansion in Malaysia. The new printer customer could potentially become a major customer of the Malaysia plants from 2007. Innovalues is still in active discussions with the customer to expand into shafts and rubber rollers for printer products.

In the automotive segment, Innovalues continues to see good volume growth for Sensata’s braking sensors, driven partly by greater allocations from the customer. It has also completed trial production for Siemens VDO’s diesel engine fuel injector components, and is awaiting the customer’s go-ahead for mass production.

China facilities are also running at full steam.
During our visit to the China facility, which focuses on its OA and automotive segments, we noted that business activities remained robust, and understand that this site has been operating at full capacity since the beginning of 2H06. It has started mass production for Sensata’s auto pressure transducer (APT) components, programmes transferred from Japan. Monthly volume has increased from less than 100,000 units to more than 200,000 units currently, and we believe volume will continue to grow as Sensata also plans to transfer programmes from Holland to Shanghai next year. These two sites account for about 40% of Sensata’s annual requirements of about 80m sets. The Shanghai unit has also started plating services for LUK, and is in advanced discussions with Robert Bosch for fuel pump components. The OA business, mainly shafts and rubber rollers to HP and Samsung, is also enjoying good loading, though volume has started to taper off in mid-November. This is in line with historical trends. The company is also on track to expand its China facilities from 88,000 sf to 161,000 sf in 2007 to support rising demand.

Thailand affected by slowdown in HDD component business.
The Thailand plant, on the other hand, is still operating at only 80% utilisation, affected by cutbacks in HDD component orders from Minebea as the latter decided to bring more production in-house.

According to Innovalues, sales of HDD components have declined by more than 40% from 1H06. Fortunately, the slowdown in HDD components business has been partially offset by continuous strength in occupant weight sensors. Also, it has started to supply HDD components to a new Korean customer, though volume is still insignificant. However, we understand that volume may pick up strongly in 2007 when the Korean customer starts to expand its HDD components business.

Risks
Slower-than-expected ramp for new automotive programmes, which is quite common in the automotive components industry. Our forecasts are already conservative, assuming 86% and 54% yoy growth for automotive components for FY07 and FY08 respectively, vs. its customers’ indication of more than 200% and 80% yoy jumps in requirements.

Margin pressure from rising material costs, which affected its bottom line in FY04. The company, however, has taken initiatives to provide alternative materials (switching from C1214 to C1215) for its OA customers in 2H05. We understand it is now working closely with its suppliers to lower costs further in 2007, which should cushion future material price increases, if any.

Valuation and recommendation
Maintain Outperform; unchanged target price of S$1.52. We have kept our FY06 numbers. Our FY07-08 numbers are also intact, though we believe there could be upside surprises if the entire automotive components business takes off as planned. Our target P/E of 13x, which translates into a target price of S$1.52 for 79% upside, is pegged at a slight premium to its historical average P/E in view of the healthy 34% earnings CAGR projected for FY05-08. Maintain Outperform, and we see catalysts from a solid set of fullyear results (to be announced by end-Feb 07).

posted by gsg @ 10:34 PM