KGI Research Singapore

Singapore's leading broker offering Futures, FX, Equities and Wealth Management.

Innotek Limited (INNOT SP)

Company Update (Updated 21 May 2021)

Caught the EV bug

  • Auto is the way. FY20 results were another show of resilience and InnoTek performed largely above our expectations. Through the annual report and annual general meeting, management has communicated strong expectations for the automotive division, led by a strong push for electric vehicles in China.
  • 1Q21 unaudited results are promising. InnoTek provided 1QFY21 results during its Annual General Meeting, where sales of S$42.3mn are up 25% YoY with a net profit of S$2.47mn. We think these figures are within range of our improved FY21 estimates.
  • Maintain OUTPERFORM with higher TP of S$1.12. We expect InnoTek’s strategy to drive a recovery in both the top and bottom line. Our 5.5x EV/EBITDA peg translates to around 14.3x FY22F P/E.

FY20 sales mix for InnoTek shifted substantially in favour of automotive and television products, where both divisions saw strong demand in 2H20.

FY20 gross margins reached 24.6%, a new high, behind ~S$2mn of government subsidy support and increased in-house production. Admin expenses also came in ~S$2mn below our estimates, leading to PATMI that came in 36% above our estimate.

InnoTek’s management has highlighted their focus on the automotive business, behind a returning momentum of China auto sales. Currently, 4M21 auto sales in China are +52% of 4M20 and +4% of 4M19 despite chip shortages (Fig. 2). IHS Markit expects light vehicle sales to grow at 6% CAGR from 2020 to 2023, with electric vehicles (EV) to lead growth at over 30% CAGR in the next 5 years. In response, InnoTek has managed to secure customers in the EV space, and can reasonably expect the automotive division to become their largest division in subsequent years.

The TV/Display division posted ~29% sales growth in 2020 as home entertainment took priority in COVID-19. In 1Q21, TV panels, a complementary product to InnoTek’s TV bezels and back panels, continue to be shipped at a steady volume (Fig. 3), indicating steady demand in 2021. Meanwhile, while Office Automation did poorly in 2020, InnoTek has managed to expand into assembly jobs for its customers, with expectations of a rebound in 2021 behind a recovering global economy.

InnoTek has released 1Q21 sales and profit figures, which account for around 22% of our new FY21F estimate. We note that 1Q sales typically account for 22-24% of FY results (Fig. 4), given seasonality effects. We expect 2H21 to produce the bulk of results as raw material prices come under better control and the semiconductor shortage clears.


Forecasts

We raise sale forecasts across the 3 divisions. Our overall FY21/22/23 sales growth forecast is now 6.7/4.3/3.6%. We raise gross margin forecasts and trim admin expenses. We kept income tax estimate at 16% given the renewal of the tax concession for Magix Dongguan.

Valuation & Action

Maintain OUTPERFORM, with increased Target Price to S$1.12.

We raise our EV/EBITDA peg to 5.5x bringing it more in line with SGX-listed peers and roll forward estimates to be based on FY22F figures. Our EV/EBITDA peg implies a P/E of 14.4x for FY22.

Risks

Worsening of COVID-19, which can potentially disrupt working conditions within the industry. Semiconductor shortage can possibly lead to some order pushbacks across InnoTek’s 3 divisions, dampening 1H21 results. Rising raw material costs could also pressure gross margins, Forex risk, product obsolescence.


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