GEM Exclusive- Investment Idea: Innotek
29 May 2019
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Mkt cap: $118m; Price: $0.52, P/B: 0.77x, 2018 P/E: 5.8x, Ex-(cash+financial assets) 2018 PE: 2.4x; ~2-2.4x EV/EBITDA, Dividend yield: 2.9%
About: Precision metal components manufacturer serving mainly Office Automation, Automotive, TV & Display with over 40 years of operational history; Customers include major MNCs such as Ricoh, Canon, Continental, Sony, Innolux, Epson, Bosch, Innolux
Nearly 100% of Valuation backed by hard assets= Cash (S$0.257) + Investments (S$0.053) + Investment properties (S$0.120) + buildings and land only in PPE (S$0.07) = S$0.498
Net cash of S$0.257/share as at 31 Mar 19 (after adjusting for S$0.01 dividend paid on 22 May 19)- forming about 50% of market cap-S$39.6m cash, S$20.7m in structured deposits (a combi of deposit and investment product, investors will receive 100% of principal if held till maturity). If you include the investment portfolio (equities, trusts, bonds etc) of S$12m, it will boost net cash + financial assets = S$0.310 (about 61% of mkt cap)
Strong Free cashflow generation- average S$0.043 of free cash generated/year in the last 3 FYs - notwithstanding any dividend payment and if innotek maintain its cashflow generation, it will take about 5 years for Innotek’s market cap to be fully backed by $.
Huge Turnaround attributable to savvy management- who came on board in late 2015, and the turnaround has almost been immediate, with Innotek successfully reversing from a loss in 2015 to a profit in 2016, before nearly doubling in profit (from 2016) to S$20m in 2018. It is always reassuring to see Management who are always adapting to market trends and not resting on their laurels, as in the case of Innotek – With good foresight, Management had diversified into heatsinks, automotive displays earlier on, which had helped to soften the impact of a declining trend where tradition metal TV bezels are being replaced by plastics. Similar can be said by management’s decision to set up a new facility in Thailand to be nearer to its customers (short term pain, long term gain), regaining market share for its office automation. Innotek is now looking to be an even more integral part of its customer’s supply chain as it transits from single component supply to assembly.
Management put his money where his mouth is. In 2016, Mr Lou (CEO) owns about 5.3% stake in innotek. He doubled his stake in the group in Jul 18 to 11.5% by acquiring shares in the group at S$0.40/share- tying his fate even more closely to shareholders.50% rise in dividends With the improvement in profit, Innotek has also rewarded shareholders with a 50% rise in dividends to S$0.015 for FY18, (a needle in its haystack of S$0.31 worth of $$)
Stellar 1QFY19 results with a 29% rise in gross profit, and a surge in net profit (amidst a low base) to S$3.9m. Free cashflow generated was super strong too (S$0.054/share). However, share price has fallen 15% since, on concerns of a weaker outlook from a slower Chinese economy and greater macro uncertainty.
What we think: While the outlook is more murky for cyclical stocks such as Innotek, its low valuation (one of the lowest among its peers, and also happened to be backed nearly 100% by hard assets (thinking from a liquidation perspective), gives Innotek a high margin of safety for investors. Investors can also sleep with a peace of mind that the company is currently run by a savvy management who have proven themselves over the last 3 years (including their ability to adapt to market trends) and also put his money where his mouth is, riding the up and downs with shareholders. With its cash flow generative nature, innotek will only get “cheaper” as time goes by as cash accumulates.