The potential superstock of the week is InnoTek Limited (SGX:M14) . InnoTek's wholly-owned Mansfield Manufacturing Company Limited is a ...

Weekly Superstock Scan 12 Jun - 16 Jun 2017: InnoTek (Singapore)

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The potential superstock of the week is InnoTek Limited (SGX:M14). InnoTek's wholly-owned Mansfield Manufacturing Company Limited is a precision metal components manufacturer serving the consumer electronics, office automation and mobility device industries. It manufactures and sells precision metal stamping components, tooling and die-making, sub-assembly of stamped components, frame components and investment holding




 For reporting purposes, InnoTek is organised into three operating segments:
  • Precision components and tooling segment: sales of stamping components, tooling design and fabrication to a wide range of industries such as automotive components, office automation and consumer electronics products. It also provides die making services to manufacturers of such products.
  • Precision sub-assembly segment: Sub-assembly of products mainly from the TV and office automation industries. Also has speciality in metal-related components for customers in the TV, Tablets and Mobile-phone industries through advance technologies like cold-forging, CNC machining and surface decoration.
  • Corporate and others

Technical



InnoTek has been trading in a tight range between S$0.35 to S$0.40 since March 2017. In the past two weeks, volume has increased tremendously. Last week, price closed above the range at $0.42, and the volume for the week was 17.5 million shares, approximately 15 times its weekly average trading volume.

The close of $0.42 was also its all time highest close. There was no earnings release and no press release the past two weeks except for a notice of transfer of treasury shares, which should have minimal impact on the share price. The cause of the volume and price spike is therefore unknown to me now.

Fundamental



Including the current quarter, InnoTek reported 6 consecutive quarters of year on year EPS growth. 

Turnaround Play

From 2011 to 2015, InnoTek's performance was disastrous with only two profitable years out of these five years. Furthermore, the losses were way bigger than the profits in these years. InnoTek also failed to generate positive cashflow from 2013 to 2015.


All these changed for the better in 2016 as InnoTek reported a net profit of S$11.6 million, an upswing of S$27.9 million in earnings from the previous year. This is the result of successful operational changes, leading to gross profit margin improving sharply to 19.1% in FY16 from 6.5% in FY15.

Management Change

I rarely consider a management change a catalyst, but this time round, I am convinced by the management's ability to turnaround the company. Mr. Lou Yiliang was appointed Executive Director of InnoTek and Chief Executive Officer of InnoTek’s Mansfield Group on 2 November 2015. Since then, he has identified the need to  transform their operations, improve their value proposition to existing customers and to win over new customers.


Mr Lou assembled a team of experienced manager to implement strategies to  focus on product innovation, staff training and how to improve operating cost efficiencies, automation and customer engagement. The results were seen one year later with drastic improvement to the company's performance. And on 1 March 2017, Mr Lou was re-designated as Chief Executive Officer of the InnoTek. 

Mr Lou's no nonsense approach can also be seen in the annual letter to shareholders. In FY2015, he admitted that InnoTek's skill sets have fallen behind competitors and in FY2016, he admitted that InnoTek's previous competitive advantages had ceased to exist and there was a drop in quality of deliverable to their customers. I believe that identifying and facing the problems directly will eventually allow InnoTek to solve their problems.

Establishment of Thailand Subsidiary

To support a major customer which has relocated to Thailand and to maintain strong relationship and orders from such customer, InnoTek has decided to invest and establish its own manufacturing operations in Thailand starting this financial year. 

As some of their office automation customers have relocated their production to Southeast Asia, starting an operation in Thailand may be able to prevent further loss in customers.

The Thailand operation will not commence till FY2018.

Matrices
+ Low P/E - With a trailing twelve month EPS of $0.065, at the current price of $0.41, it is trading at a low P/E of 6.3 times. This low valuation for a turnaround play limits my downside risk.
- Large Float - InnoTek has a large float of  121 million shares. With a average volume of 800 thousand shares shares, the float is about 150 times its daily trading volume.

Risk Factors/ Things I do not like


  • Falling Revenue - Including the current quarter, InnoTek has 5 consecutive quarters of falling revenue. There is a limit on how much profit can grow from cost savings and revenue has to grow to continue the growth. The new CEO has proved himself as a master of cost savings, but he needs to do more to grow revenue.
  • Lack of Liquidity: The volume of shares traded has picked up recently but just a couple of months back, there were many days when less than 100 thousand shares traded per day. It will be difficult to enter or exit a trade when the volume is low.



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