KGI’s Kenny Tan has given an “outperform” rating to Innotek with a target price of $1.12, up from his previous target price of 73 cents.
The company has posted FY2020 results that Tan describes as “another show of resilience” and “above KGI’s expectations”.
In a May 21 report, he points out that 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.
Tan has confidence that this strategy will drive a recovery in both the top and bottom line.
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He highlighted that the FY2020 sales mix for InnoTek shifted substantially in favour of automotive and television products, where both divisions saw strong demand in 2HFY2020.
“FY2020 gross margins reached 24.6%, a new high, behind $2 million of government subsidy support and increased in-house production. Admin expenses also came in $2 million below our estimates, leading to profit after tax and minority interests (PATMI) that came in 36% above our estimate.” Tan noted.
Furthermore, he also pointed out that the company’s 1QFY2021 unaudited results are “promising”, saying 1QFY2021 sales figures of $42.3 million are up 25% y-o-y, with a net profit of $2.47 million. “We think these figures are within range of our improved FY2021 estimates.”
InnoTek’s management has highlighted their focus on the automotive business, behind a returning momentum of China auto sales. Currently, Tan said 4M2021 auto sales in China are 52% higher compared to the same period in 2020 and 4% higher compared to 4M2019, despite chip shortages.
A report from IHS Markit expects light vehicle sales to grow at a compounded annual growth rate (CAGR) of 6% 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.
In Innotek’s other segments, Tan noted that the TV/Display division posted about a 29% sales growth in 2020 as home entertainment took priority in Covid-19.
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In 1QFY2021, TV panels, a complementary product to InnoTek’s TV bezels and back panels, continue to be shipped at a steady volume 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.
Despite a seemingly rosy outlook, the analyst warns of risks such as a worsening of the Covid-19 pandemic, which can potentially disrupt working conditions within the industry. Semiconductor shortage can possibly lead to some order pushbacks across InnoTek’s 3 divisions, dampening 1HFY2021 results.
As at 2.24pm, shares of Innotek traded at 93.5 cents, up 3 cents or 3.3% higher, with a FY2021 price to book ratio of 1.1 and a dividend yield of 2.2%
