INNOTEK (LIM&TAN)

S$0.35-INNOT.SI

• The key point at the result briefing yesterday was that business conditions will continue to remain challenging over the next few quarters reflecting market share loss by their key Japanese customers (Sharp, Panasonic, Toshiba, Canon and Ricoh) to their Korean competitors (namely Samsung and LG), further margin pressures from intense competitive pressures from Taiwan listed Hon Hai, continued high cost pressures in China, volatile forex rates and flooding in Thailand causing supply chain disruptions.

• As a result of the above, quarterly sales will continue to trend downwards, but management hopes to remain in the black (albeit on a very marginal basis) via cost cutting measures.

• We are less optimistic and expect them to swing into operational losses in the next quarter from break even levels in 3Q’11. 3Q’11 profit of $1.2mln was helped by dividend income from Sabana Reit of $300,000 and rental income of $900,000, hence the company was operationally break even.

• 4Q’11 will benefit from a one-off gain ($1.7mln) from the disposal of an investment in the US.

• While management said that they will continue their share buy back program due to the low 0.46x price to book, we note that they can only buy back another 1.28mln shares before they hit the regulatory 10% limit of 22,704,142.

• Innotek is currently in a net cash position of $25mln, representing 29% of its market cap. Notwithstanding this, management hinted that due to the depressed fundamentals, weak outlook and likely need to conserve cash for acquisitions, expansion and investments in new businesses, the company’s last 5 years of at least 5 cents a share in dividend payment will not likely be repeated in Feb’12 when they announce full year to Dec’11 results. (This will likely disappoint investors who have been used to receiving at least 5 cents a share in dividend over the last 5 years)

• At 0.46x price to book, valuation is right in the middle of its historical range (high of 0.7x and low of 0.2x).

• Since our Neutral call in Aug’11, the stock has basically flat-lined (supported by the company’s share buy backs but capped by its weak fundamentals) and we see no reason to change it.