Excerpts from analyst's report

UOB Kay Hian analysts: Nicholas Leow & Andrew Chow, CFA

GohLengTse9.14Goh Leng Tse, CEO of Innovalues. Photo: CompanyInnovalues (IP SP) Considering Strategic Options; Strong Hint At M&A ahead?
Innovalues announced that it is considering “strategic options” to enhance and unlock shareholder value. While not definitive, this could be a potential indicator of an M&A.

Maintain BUY with a DCF-based target price of S$1.06, but based on comparable M&A transactions, we think our target price could rise up to S$1.22 should an M&A materialise. 

 Share price excitement on potential M&A. The group announced yesterday that they have appointed Rippledot Capital Advisors (RCA) to conduct a review of strategic options with a view of enhancing and unlocking shareholder value. RCA is a well-regarded independent strategic and financial adviser to corporate entities, entrepreneurs and investors focused in the Asia Pacific region. RCA has advised on over US$50b of transactions in the Asia Pacific Region, including the privatisation of Goodpack.

 Positive industry dynamics. The current environment of low gas prices and low interest rates has spurred demand for new cars. Auto sales in the US hit a record high of 17.47m units in 2015 with expectations of a strong 2016 as more young buyers enter the market.

Strong financials could attract suitors
"The group’s strong cash generation and low capex requirements could see its net cash rise up from S$0.08 per share in 2015 to almost S$0.20 per share in 2018. In addition, free cash yield is estimated at 7.5% and 8.7% for 2016 and 2017 respectively."

-- UOB Kay Hian report

The Chinese government cut the 10% purchase tax in half on cars with engine capacity of less than 1.6 litres.

 High barriers to entry and solid customer relationships make Innovalues attractive. In 2014, Innovalues derived over 80% of its total revenue from the automobile segment.

The auto segment has high barriers to entry due to the time it takes to attain qualifications and automakers’ long-standing relationships with customers. Innovalues spent about two years to achieve certification for the production of auto components.

Full report here.

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