Excerpts from analysts' report

CIMB analysts: William Tng, CFA & Ngoh Yi Sin

Goh Leng Tse 5.2015Goh Leng Tse, CEO of Innovalues.
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9M15 revenue in line at 71% of our/consensus full-year; we expect a stronger 4Q.

9M15 gross margin expanded to 29.8% on stronger US$ and operational efficiency.

9M15 net profit was above expectations at 83%/80% of our/consensus numbers, helped by FX transaction gains.

Current share price: S$0.76

Target price: S$0.93

3Q15 topline dips 3.3% yoy and 4.3% qoq, but within expectations
● The slight drop in 3Q15 revenue was largely due to a decrease in orders from the automotive (AU) segment (-6.8% yoy, -4.1% qoq), but this was partially offset by stronger office automation (OA) sales (+16% yoy, -3% qoq). The AU segment remains the core operating segment, accounting for 78% of 9M15’s sales.

9M15 gross margin rises 4.5% pts to 29.8%

● As a result of favourable currency movements (more than 90% of sales are in US$ vs. operating currencies like RM, THB and Rmb) and improved operational efficiency, 9M15’s gross margins expanded from 25.3% to 29.8%. This was within the range guided by management and in line with our FY15 forecast of 29.5%.

9M15 net profit rises 75% yoy

● Innovalues saw a 61.2% yoy and 13.9% qoq growth in net profit in 3Q15, thanks to substantial margin improvements and FX transaction gains. Finance costs fell 35.2% yoy for 3Q15 as the company scaled back on term loans and finance leases.

Positive outlook still dependent on automotive
● Automotive inventory surplus in China may have embarked on a correction trend after sales in Sep rose for the 2nd consecutive month, reversing the declines seen in Jun-Jul 15.

Coupled with strong automotive sales in US and UK, increasing global regulatory standards towards safety, energy-saving and environmental protection will continue to be tailwinds for Innovalues. Completion of the relocation of OA operations from China to Malaysia should translate to lower operating expenses after 3Q15.

Maintain ADD

● We keep our ADD rating, DCF-based target price and earnings forecasts unchanged, pending the analysts’ briefing tomorrow.

Full report here.

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