Brokers' take: KGI raises target price for InnoTek on China EV push, 'promising' Q1 figures

KGI Securities has raised its target price for InnoTek Limited to S$1.12 from S$0.73 previously with an unchanged "outperform" rating, after hiking its valuation on the stock and rolling forward estimates to base them on FY2022 projections.

The new target price is pegged to 5.5 times EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation and amortisation) and translates to around 14.3 times FY2022 price-to-earnings (P/E) - bringing InnoTek more in line with its listed peers.

Hailing the group's latest set of FY2020 results as "another show of resilience", analyst Kenny Tan highlighted in a Friday report that the group's management had communicated strong expectations for its automotive division through its annual report and recent annual general meeting.

"InnoTek's management has highlighted their focus on the automotive business, behind a returning momentum of China auto sales… (The group) has managed to secure customers in the electric vehicle (EV) space and can reasonably expect the automotive division to become their largest division in subsequent years," said Mr Tan.

Further, InnoTek’s Q1 unaudited results presented at its 29 April AGM showed that sales were up 25 per cent on-year at S$42.3 million to indicate a net profit of S$2.5 million for the quarter. Mr Tan considers these results "promising", as the figures fall within range of KGI's improved FY2021 estimates for InnoTek.

Noting that Q1 sales typically account for 22-24 per cent of fiscal year results due to seasonality effects, the analyst is expecting H2 FY2021 to produce the bulk of full-year results as raw material prices come under better control and the semiconductor shortage clears.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

As such, Mr Tan has raised sale forecasts across all three of InnoTek's divisions such that his overall FY2021-2023 sales growth forecasts stand at 6.7 per cent, 4.3 per cent, and 3.6 per cent respectively.

Downside risks to KGI's view include the potential worsening of Covid-19 which may disrupt working conditions within the industry.

"Semiconductor shortage can possibly lead to some order pushbacks across InnoTek's 3 divisions, dampening H1 FY2021 results. Rising raw material costs could also pressure gross margins, foreign exchange risk (and may result in) product obsolescence," cautioned Mr Tan.

Shares of InnoTek ended Friday 4.5 Singapore cents or 5 per cent higher at 95 cents.