(Stocks Discussion) SGX: Innotek Holdings Ltd (SGX: M14)?

Companies primary business is in doing precision metal components for other manufacturers. This is probably one of the good S-chips I will look at, run by good management. Since the new CEO took over, the Gross Margin has grown from 7% to 20% after he took over. This meant production costs has came down.
The company's current market value is trading close to its "cash + short term investment- minus debt" levels which I feel is of a good value. The company's business has been generating positive operating cashflow since the new CEO transformation with growing profits.

TL;DR The firm's financials seem quite healthy, and the shares seem to be trading at a cheap price. Despite revenue, profits have actually grown over time, which shows that the firm is becoming more efficient in reducing costs.

Source: Innotek Holdings Ltd Annual Report FY2018

Business Profile

Innotek is a precision metal components manufacturer serving the consumer electronics, office automation and mobile device industries. The three business units - Precision metal stamping, Tools and Die design and fabrications, Integrated Processes and Assembly. Additionally, most of their customers are from Japan and Europe and have six manufacturing plants in China

Financials

Income Statement

Source: Innotek Holdings Ltd Annual Report FY2018

The company's revenue has been decreasing over time, from a high of $233mn in 2015 to $218mn in 2018. Despite this, net profits have grown quite well over the past few years. This also means that the firm has become more profitable and efficient time, and is a very healthy sign.

As shown, the bulk of the revenue comes from Precision Components and Tooling. This might suggest higher concentration risk since if anything were to affect this particular revenue stream, the firm will suffer more. The end products, however, are well split between TV and Display, Automotives and Office Automation. Since these are the ultimate consumers of the products, their demand will ultimately affect Innotech's earnings. Being well split, there is lesser risk involved where Innotech is too reliant on one particular product line.

Balance Sheet

Source: Innotek Holdings Ltd Annual Report FY2018

Innotech does have a very strong balance sheet as well. The company does not hold that much debt and has very strong short-term liquidity. This is observed from the high current ratio. The firm also has quite little non-current liabilities, as most of their liabilities are current. Although this might suggest a higher risk in the short run, liabilities are only 1/3 of assets.

Efficiency Ratios

Overall, the company seems efficient. This is due to the high earnings and the efficiency of the assets and capital. It seems that the firm might have greater potential to become even more efficient if it can use their excess cash to prevent in their business.

Cashflows

The company seems to be generating good cashflows as well. This is evidenced by their high Free Cashflow. However, cash flows have been weakened by working capital conditions. If such conditions were to improve, cashflows might grow even further. Without any debt, most of the free cash flow is directed into the equity portion as well. I do think that based on their cash flows for a capital intensive firm is already looking quite strong. Given their current dividend payout ratio and dividends as % of FCF and cash balance, I do believe dividends can be sustained.

Valuation

The firm seems to have healthy financials, and the shares seem to be trading at quite cheaply as well with a P/E ratio of only 5.9. The firm does seem to be potentially undervalued. The firm does have a higher Beta of 1.4. This implies that the firm has a higher market risk, which would discount the share's future cash flows.

Share Price Performance

Source: Yahoo Finance

Over the last year, their shares have outperformed the STI with a return of almost 30%. This is quite drastic compared to the STI's rather lacklustre drop. Over the last 5 years, the firm did return 74%, which is pretty impressive. However, share prices are more volatile.