Sunday, March 21, 2010

Welcome to the "World of Innovation"

Innotek specializes in precision component manufacturer. The SGX listed firm produce small tiny metal components which are building blocks for numerous devices which we use daily.

The group was known as Magnecomp previously. It has restructured heavily in recent years. One of the moves was to acquire the remaining 17% in Mansfield Manufacturing in April 2008. Following this acquisition, Innotek, through Mansfield owns ten modern manufacturing facilities, including eight in China, one in Netherlands and one in the Czech Republic.

Currently, Innotek serves customers in the consumer electronics, office automation and automotive industries. It recently reported full year results for 2009. For the full year, Innotek reported a 14% decline in revenue to S$361 million.

What analysts, however were looking out for was confirmation of a bottom line turnaround. Innotek delivered. Net profit surged sharply into the black to S$9 million compared to a loss of S$6 million in 2009. This follows from the return to profitability of Mansfield. With EPS at 3.24 cents per share, its PER is 15x. Whilst this multiple appears high, note that further compression will occur as the business improves out of the trough. So paying what appears to be peak multiples for trough earnings and on a before ex-cash basis appear reasonable.

With stock price only at S$0.50 and NTA at S$0.86, Innotek is trading under book at less than 0.6x. Management appears determined to correct this.

For the second year in a row, shareholders are rewarded with a 5 cent dividend. With the stock at 50 cents, this translates to an astounding 10% yield! This is paid out of its huge cash pile of approximately S$0.28 per share. Whilst this may drop as the group seeks acquisition targets, management is likely to retain sufficient cash for working capital requirements as well as for future payouts.

Second, management has also embarked on a share buyback program. The completion of the program is likely to drive the NTA per share to over S$0.90 share, thereby steepening its discount further.

Analysts are also increasingly engaged as management seek to correct the steep discount. For example, it was recently shared that Innotek intends to pursue opportunities in the automotive and medical related sectors which offer higher margins.

In a nod to Innotek's tagline "World of Innovation", buyers now are, by virtue of its fat dividend, paid to wait for the sharp discount to close. As value investors, we find that certainly most inventive!



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