■ Stable sales from Sensata but fewer orders from Hilite led to weaker 3Q15 topline.
■ Stronger OA segment led by greater HP orders (new and existing printer rollers).
■ Worst-case scenario on VW impact: 10% cut in FY15 sales and lower DCF-based TP of S$0.78.
■ Sooner-than-expected new projects are catalysts while order pushback is a key risk.
■ We reiterate our Add call and DCF-based TP of S$0.93 (WACC:12.9%) given its net-cash position and attractive dividend yield of 4.8% (on average).
3Q topline weakness: decrease in orders from Hilite
The 6.8% yoy and 4.1% qoq fall in AU sales was attributed to decrease in orders from Hilite International, Innovalues’s second largest customer. Orders of engine/ transmission parts (to end client, Volkswagen) were delayed on the back of its automotive inventory correction in China, which have since recovered gradually in 4Q15. Sales contribution by Sensata remained relatively stable.
HP driving OA growth
Besides redirecting more orders to Innovalues as a result of relocation, a new printer design by HP (which uses 7-8 rollers per printer vs. 2-3 in previous models) has been driving the yoy double-digit growth in the office automation (OA) segment for the past few quarters. Still in its initial phase, the gradual ramping-up of production will continue to be a driver for OA sales.
VW: diesel, then gasoline. Worst-case scenario?
Innovalues’s direct exposure to VW is less than 1% of 1H15 sales, while indirect exposure is mainly through Hilite, which supplies parts for VW’s gasoline engines. Our worst-case scenario assumes a drastic 10% cut in FY15 sales to eliminate its exposure, but keeping other forecasts unchanged – this gives us a lower DCF-based target price of S$0.78. FY15, FY16 and FY17 EPS will decrease by 11%/14%/16% respectively in this scenario.
Re-rating catalyst: new transmission-related project
Innovalues is still in talks with Hilite for a new transmission system which is expected to contribute substantially when it materialises (estimated to be in FY17). We see this, together with more new projects, as a potential catalyst for Innovalues. In view of the pushback in projects together with FX gains in FY15, we adjust our EPS for FY15 (+5.0%), FY16 (-0.9%) and FY17 (+0.7%). Our DCF-derived target price (WACC:12.9%) of S$0.93 remains intact.
Maintain Add, dividend yields of 4.1-5.5% for FY15-17
With the transmission project delay, there is scope for higher dividends. At 50% of FCF after accounting for capex and debt repayments, we forecast a DPS of 3.2 Scts (base case) for FY15. This translates into dividend yields of 4.1-5.5% for FY15-17. As a beneficiary of more stringent regulatory standards on safety, energy conservation and environmental protection, we continue to like the company and hence, reiterate our Add recommendation. Further order pushback is a key risk. (Read Report)
Source : CIMB Research