Brokers’ take: Lim & Tan positive on Innotek cash position, initiates ‘buy’

LIM & Tan Securities on Monday (Nov 28) initiated coverage on Innotek : M14 0%, a precision metal components manufacturer, with “buy” and a target price of S$0.60.

The target price implied a potential 42.9 per cent upside from the counter’s last trading price of S$0.42 as at 2.49 pm on Monday. Innotek’s shares were flat at the time.

The research team noted that with S$77.4 million in net cash, Innotek’s core business and assets are “almost free”. Having a robust balance sheet with a net cash position also means the company will be able to pay out dividends.

Due to its huge cash pile, Innotek stands to benefit from a high interest rate environment, yield curve inversion and short-term fixed deposits, Lim & Tan noted.

The research team said Innotek will benefit from margin expansion and realised gains as a result of a stronger US dollar. Innotek received more than half of its revenue in US dollars and paid out its major costs in Chinese yuan and Thai baht.

Previously, the counter fell by 57.6 per cent from a high of S$0.99 in April 2021 after its H1 2021 earnings were impacted by Covid-19 lockdowns, higher cost of raw materials and supply chain disruptions.

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With the disruption priced in and the easing of Covid-19 restrictions, Lim & Tan said it expects this situation to potentially reverse as Innotek starts recognising revenue amid new orders and production resuming. The cost of materials such as steel and aluminium has declined from its peak, boosting margins.

The research team noted Innotek’s strong management team, led by chief executive and non-independent director Lou Yiliang, who has implemented “radical” restructuring initiatives to boost productivity and profitability. 

Lim & Tan said cash flow in the second half of 2022 will “improve significantly” due to operating activities resuming. It also believed Innotek will be able to maintain a dividend payout of S$0.02 in FY2022.