Money Plant, who contributed this article to NextInsight, owns shares in InnoTek. She has not met management, and the article is based on her own analysis and assumptions.

 S$’m

1QFY17

1QFY16

Change %

Revenue

51,084

52,961

(3.5)

Gross profit

9,710

8,027

21.0

Gross profit margin

19.0

15.2

3.8 ppt

Net profit

2,546

(508)

NM

• InnoTek is one of the few laggards in the manufacturing sector that have yet to see a re-rating. 

• Under a new management, the company turned around in 2016 aided mostly by organisational restructuring that has improved the cost efficiency of the group. 

• In 2017, it's likely to see further cost efficiency but sales growth remains a challenge as sales under the office automation segment has continued to decline, and current programs of the automotive segment are nearing end of life (mass production of newly-secured automotive programs has just started). 

• However, I like the management who has turned around the company in just a year of taking over. With an asset-backed valuation of S$0.386 as a potential “floor” for my investment, I have faith the current management can take InnoTek back to its glorious days.

Looking to 2QFY17F

• Wages contributed about S$14.5m in 2Q16 admin and inventories expense. Assuming InnoTek maintains its wage expense as per 1QFY17 of S$12.5m, that alone will yield nearly S$2m of savings in 2QFY17. (PBT in 2Q16 was only S$2.5m). However, other factors may be in play such as sales decline, forex losses, fair value gain/loss etc.

innotek factory5.17InnoTek is a leading metal specialist with extensive experience in metal stamping and die fabrication. Photo: Company

 

Investment merits

Risks

Attractive valuation in a “hot” sector that is undergoing a re-rating

  • Trading at 2.3x EV/EBITDA, it is at nearly a 50% discount to its peers’ average, and the lowest in terms of P/B at 0.7x (the EV/EBITDA includes the held-for-trading investments which consist of S$10.9m bonds and S$4.4m equities according to AR16)
  • Management is investing in a new facility in Thailand, which may reduce some cash in the near term
  • Downside capped with asset-backed distressed valuation? S$0.386/share of its assets are in the form of investment property, cash, held-for-trading assets and only leasehold buildings in PPE.

Speedbump in earnings recovery?

  • Sales has been dropping yoy due to lower demand for office automation and consumer (management had forecasted another 15% drop in 2017 following decisions by major customers to relocate their production plants to cheaper SEA countries), as well as automotive sales which were lower as they near end of life mass production.

However,

  • Automotive: some newly secured programmes have started mass production in 1Q17 (and hopefully that may help to partially offset the drop).
  • Office automation: InnoTek plans to invest in a new plant in Thailand following a major customer’s relocation. While this may result in heightened capex in the near term, it is good for the future of the company, as it is keeping up with customer trends and strengthening relationship. May also benefit if cost of production is lower there.
  • TV segment: continued to be strong as previously expected by management due to move towards higher def TV (eg. 4k, 8k)

Savvy new management (with a stake in the company)

  • CEO owns about 5.3% stake in InnoTek-AR16
  • Joined in Nov 15, successfully led a turnaround in InnoTek from adjusted loss before tax of S$10.3m to PBT of S$13.8m, despite sales decline of 8% yoy.
  • Wages fell 15% yoy in FY16- headcount was about 19% lower yoy.

Heightened CAPEX in near term as a result of expansionary capex in Thailand - but this is for a better future of the company.

Turnaround story

  • FY16 turned around with S$11m profit. Continued turnaround in 1Q17 - reversed from a loss of 0.5m in 1Q16 to 2.5m - due to lower depreciation, maximizing in-house production to reduce subcon expense, and lower wages from lower headcount and reduction in overtime.
  • Retrenchment cost was S$1.8m for FY16 (should be lower in FY17? Although likely to still incur some as restructuring efforts continue.)
  • Looking to 2QFY17F. Wages contributed about S$14.5m in 2Q16 admin and inventories expense. Assuming InnoTek maintains its wage expense as per 1QFY17 of S$12.5m, that alone will yield InnoTek nearly S$2m of savings in 2QFY17. (PBT in 2Q16 was only S$2.5m). However, there may be other factors in play such as sales decline, fx losses, fair value gain/loss etc.

Limited track record of new management (only about 1-2 years since they took over)

Good cashflow generation

  • The manufacturing sector has been very cashflow generative.
  • InnoTek generated S$7.8m of free cashflow in FY16, translating to about 8% FCF yield.
  • CF generation remained strong in 1Q17 with FCF of S$2.7m (2.9% yield).

Foreign currency risk?

Higher dividends?

  • With the exception of FY15, InnoTek has been paying  dividends since FY07, totalling S$0.425 a share.
  • Following the turnaround in FY16, paid S$0.005/share of dividend. CEO owns a 5.3% stake in company, and with InnoTek’s history of rewarding shareholders with dividends, I believe should profit continue, we could see higher dividends.


Where is the floor for the share price?
Distressed asset-backed valuation:

NAV (as at 31 Mar 17) = S$0.557
• P/B: 0.72x (on share price of S$0.40)
* InnoTek has already recorded impairment loss on PPE of S$16.7m and S$4.9m in FY14 and FY15, respectively.
• But P/B does not mean anything, if the book is made up of intangibles that may be written off… so let's have a deeper look into the hard assets

If we have to strip it down to bare bottom, S$0.386 is backed by hard assets (cash, properties, investments)
• Bulk of the liabilities are in the form of payables of about S$60.5m, which are sort of cancelled out by receivables of about S$56m.

S$m

S$/
share

Investment property

16.48

0.074

Situated in PRC - held under medium term lease - industrial complex in Hedong Industrial zone, with 42 years remaining (AR16 note 14)

Cash

34.204

0.153

Trade receivables and payables sort of cancel each other out, that is about all for liabilities

Held for trading financial assets

15.801

0.071

S$4.4m in equities, 10.9m in bonds and fixed income (according to AR 16 note 18)

66.485

0.297

PPE (leasehold buildings only @ carrying value)

19.968

0.089

as at 31 Dec 16 note 13 - we take only the leasehold buildings. Actual PPE (which include other things is S$34.8m as at 31 Mar 17)

86.453

0.386

 

 

Mkt Cap US$m

 Price

Year end

PE

     

2015

2016

2017

2018

Valuetronics

241.4

0.80

03/17

12.3

15.5

13.3

10.5

Sunningdale

283.8

2.09

12/16

9.4

10.2

11.4

10.5

CEI

69.2

1.11

12/16

8.9

10.9

9.2

8.5

Memtech

95.6

0.94

12/16

11.3

15.1

9.7

8.5

Fischer Tech

102.3

2.54

03/17

18.5

10.7

   

Fu Yu

111.4

0.21

12/16

11.0

14.6

14.6

10.3

Spindex

78.3

0.94

06/16

8.7

10.7

   

Hi-P

552.8

0.95

12/16

 

14.2

11.3

10.7

       

11.4

12.7

11.6

9.8

InnoTek

63.9

0.40

12/2016

(5.4)

7.7

   

 Source: Bloomberg

 

EV/EBITDA

P/B

Dividend yield (%)

Net D/E(%)

 

2015

2016

2017

2018

     

Valuetronics

5.34

6.31

5.52

4.55

2.00

4.45

(86.06)

Sunningdale

5.57

4.71

4.91

4.63

1.12

2.87

(3.94)

CEI

5.53

7.69

5.10

4.57

2.39

9.05

(22.90)

Memtech

4.52

5.25

3.11

2.62

0.85

2.66

(20.56)

Fischer Tech

5.27

4.66

   

1.38

3.15

(31.31)

Fu Yu

2.70

3.29

3.23

2.98

0.89

9.15

(56.07)

Spindex

3.83

4.06

   

1.17

2.45

(29.72)

Hi-P

9.59

4.48

   

1.33

0.84

(2.15)

 

5.3

5.1

4.4

3.9

1.4

4.3

 

InnoTek

 

2.32

   

0.71

1.27

(36.33)


• (EV/EBITDA for InnoTek includes held-for-trading investments which consist of S$10.9m bonds and S$4.4m equities, according to AR16)

On a PE basis:

S$m

FY16 PE (x)

Mkt cap

89.5

7.74

Less cash

(34.2)

55.3

4.78

Less held for trading

(15.8)

39.5

3.42


I expect Innotek to be highly cashflow generative like its precision engineering peers should its profit start to stabilise and grow. 

• After turning around successfully in 2016, 1Q17 continued to be cashflow generative with S$2.7m generated. Net (cash + held for trading financial assets) position rose to S$0.223 a share.

*Held for trading financial assets consist of quoted equities, trusts and bonds held for trading and managed by an investment bank in Singapore.

 

FY 2015

FY 2016

1QFY2017

12 Months Ending

12/31/2015

12/31/2016

Net Income/Net Profit (Losses)

(16.3)

11.6


2.5

Cash From Operations

(6.1)

10.0


3.3

Capital Expenditures

(2.4)

(2.2)

-0.7

Free Cash Flow

(8.5)

7.8

2.7

FCF yield

-9%

8%

2.9%

     

Net Debt

(35.0)

(45.3)

(50.0)

Net Debt Per Share

(0.156)

(0.203)

(0.223)


Management

Lou Yiliang, CEOMr Lou Yiliang (CEO) – (who owns about 5.3% of company.)

  • Joined InnoTek’s Mansfield Group as CEO on 2 Nov 15, and on 1 Mar 17 was redesignated CEO of InnoTek group.
  • Started career as an entrepreneur in the 1980s by helping to procure Toshiba consumer electronic products from Japan to China, which helped pave the way for the transfer of technology from Toshiba in Japan to major Chinese manufacturers of TV sets and other consumer electronics.
  • In 2000, set up Toyo Communication Technology (Shenzhen) Co. Ltd., which makes and assembles printed circuit boards and provides electronic manufacturing services. He remains Chairman and CEO of the company, which is preparing for a listing on the Shenzhen Stock Exchange.
  • In 2006, formed a JV with major TV manufacturer Konka to develop precision moulds for TV and office automation components as well as automotive products. The JV boasts revenues of about RMB500 million.

Mr Kuang Yu Bin (COO)

  • Joined InnoTek’s Mansfield Group in Dec 15
  • Previously held senior positions with Konka and Skyworth Overseas development and is instrumental to transforming business to a new peak.

 
About company

• Precision metal components manufacturer serving (i) Office automation (ii) Consumer electronics and (iii) Automotive and mobility industries 

• Has more than 700 stamping presses with capacity ranging from 25 tons to 1100 tons, a significant number of CNC machines, Electrical Discharge Machines ("EDM"), plastic injection moulding and grinding equipment. InnoTek’s Mansfield Group has 6 manufacturing plants in China, with total manufacturing space of over 2m sqft.

Business segments
• TV segment (less than 1 year product life cycle): Expects rise in orders for FY17 with demand for 4k and 8k panels

• Automotive (5-year product life cycle): cited positive growing sales in China and will be focused on riding the wave

• Office automation (3 years product lifecycle): Challenging year in 2016 as it saw sales declined 18% yoy, expect a further 15% decline in 2017, following a relocation of Japanese brands’ production to lower cost countries in SEA. Hence to keep up with customer trends - plans to invest in Thailand following a major customer relocating to Thailand – this may result in higher CAPEX in the near term, but may be good for the long haul (if it results in more cost savings as well as continued customer relationship).


Comments  

0 #1 Kelvin Tay 2017-06-08 00:09
Money Plant, may I know your email? I would like to ask more InnoTek.
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