Excerpts from UOB KH report
Innotek (INNOT SP/ BUY/S$0.855/Target: S$1.20)
|• Positive outlook from venturing into the EV and parts assembly business. In the outlook statement of InnoTek’s recent 2020 Annual Report dated 13 Apr 21, InnoTek highlighted that its China's Auto division is experiencing great change, with a clear shift towards electric vehicles (EV).
This means moving beyond single-part manufacturing to parts assembly. InnoTek has secured initial orders of the latter and expect orders to increase as it establishes its foothold within the segment.
• Set to benefit from a strong recovery in China’s auto sales. China has successfully contained the COVID-19 outbreak, which has led to a surge in passenger vehicle (PV) sales back to pre-COVID-19 levels.
CAAM estimates March auto sales at 2.38m units, up 67% yoy and 64% mom, and 1Q21 PV sales should reach 6.34m units, up 73% yoy.
InnoTek, which has large exposure to China’s automobile market (historically accounted for >30% of annual revenue), is set to benefit from the recovery in auto sales.
• Strong cash generating ability and high net cash balance underappreciated. As of end-20, InnoTek had a net cash position of S$90.2m, up from S$35.0m (+158%) as of end15, forming around 44% of its current market cap.
InnoTek has been paying out a DPS of 0.5 S cents since 2016, and gradually increased this to 2.0 S cents in 2020.
|• Maintain BUY with a PE-based target price of S$1.20, based on a 12x 2022F PE. InnoTek is trading at 9x 2022F PE (ex-cash PE of 5x), which is unjustified based on its resilient business model, high net cash position and high margins as compared to its peers.
Thus, we believe InnoTek should trade nearer to its peers’ multiple of 12x 2022F PE.
Risks include demand disruption from COVID-19, competition and adverse regulatory changes.
• Increasing capex spending by upstream global tech manufacturers.
• Better-than-expected 2Q21 sales and net profit numbers.
• No changes to our forecasts.
• Escalation of geopolitical tension and trade conflict between the US and China.
Full report here.