Innovalues

Innovalues (S$0.72): Maybank-KE reiterates Conviction Buy recommendation and $0.88 TP for Innovalues after the management sets bullish tone in post-results client session hosted by the house.

The counter has more than doubled since we initiated coverage with Buy on 15 Sep 14 while price was $0.335

Strong core operational capabilities, operational leverage and emerging opportunities are the three pillars of growth.

Management is unequivocally bullish on its largest segment, the automotive business. Accounting for more than 80% of its total revenue, the segment had surged 25.7% y/y in 4Q14, and is expected to expand in double-digit pace again in FY15.

Turnover at office-automation (OA) business is also ramping up. Guidance for overall revenue growth in the next three years is 15-20% per annum, a sign of confidence.

Operational leverage is expected to be reaped from the revenue growth, as higher utilisation of machinery is possible. At the projected level of growth, management says no capacity increase is needed for OA and existing automotive machinery is already fully depreciated.

Operational margins for automotive and OA should be 30+% and 15-20% respectively, supported by productivity enhancements. Innovalues wants to automate inspection, especially quantitative processes (e.g. measurement) that are subject to human error.

Meanwhile, the company is developing emerging opportunities for growth. For example, it has started producing transmission parts for two major German marques since 4Q4, it is currently exploring supplying other vehicular systems to Sensata, and it could be engaged in a major new project involving total product design with another existing customer.

Quality remains the biggest risk to the company. A high incidence of poor parts quality may negate all positive prospects stated above.

Innovalues is valued conservatively at 14x FY15E P/E, a slight discount to peer average despite bright prospects.