Excerpts from KGI report
Analyst: Tan Jiunn Chyuan (Kenny)
• We initiate on INNOTEK with an OUTPERFORM and Target Price of S$0.73, based on 5.0x EV/EBITDA, a slight discount to SGX-listed manufacturing service companies.
• Twin turnarounds. Apart from the restructuring back in2014/2015, InnoTek was able to manoeuvre around a weak COVID-induced 1Q20 performance and produce a resilient 2Q20 result that saw YoY performance improvement.
• We expect continued recovery in 2H20 and 2021, with catalysts to come from the eventual production ramp-up in Thailand and the kickstart of new automotive parts production by its partners.
Restructuring efforts successful. Current management team has a 4 year (5 year if including 2020) record for profit-making, and generating free cash flow.
InnoTek possesses a strong balance sheet with the ability to generate free cash flow and maintain current dividend rates.
We expand on this in our company overview.
Diversified customer base, stable outlook. InnoTek possesses a wide, mainly Japanese customer base, with various established company names.
COVID-19 had been a mixed bag for InnoTek as different product lines faced largely different outlooks.
However, overall business did not fall off.
Resilient ship that weathers the storm. The company maintains a sustainable business, helmed by a CEO that is focused for the long term.
InnoTek thus becomes an attractive investment opportunity in light of the continued profitability and free cash flow that they generate.
Forecasts. We expect revenues to rebound in FY21F, but stay below the S$200mn mark unless InnoTek were to announce new projects in its pipeline.
We forecast FY20/21/22F PATMI at -39%/+25%/+2.5% YoY, while FY20/21/22F EBITDA is+1.4%/+8.8%/-0.1% YoY as Right-of-Use depreciation and interest expenses climb.
We think this peg is low enough to warrant privatisation by other manufacturing companies.
Our EV/EBITDA peg translates to 13.5x 2021F P/E, in line with SGX peers.Valuation & Action: We initiate with an OUTPERFORM and TP of S$0.73, based on 5.0x 2021F EV/EBITDA, an 18% discount to SGX-listed manufacturing service companies.
Risks: Pricing pressures from competitors and customers, Forex risk, product obsolescence.