InnoTek

It does make sense from my personal experience as well. My industry is currently in a cyclical downturn. Management decided to cut bonus and several perks like traveling, entertainment and training budget. Look at neo garden and they have reported how the poor economy affected their catering business. Cutting costs is the easiest way to cushion the bottom line. But there is just so much one can do via this option without impacting quality and morale.

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(14-08-2017, 05:36 PM)specuvestor Wrote: Actually it does make sense. When times are good, people don't think about efficiency. For eg cost cuttings usually happen in down cycles, hardly during up cycle.

Even on an individual level, when sales people hit their target they are no longer interested to get the "maximum sale". It is human

Without pressure from shareholders or say creditors, it is also human that people will just milk the existing assets.

Well, that's what inferior management does.

Don't take it from me, what does TTI know.
Take it from the man himself:
http://highlights.sawyerh.com/highlights...385b4.html

"“Whenever I read about some company undertaking a cost-cutting program, I know it’s not a company that really knows what costs are all about. Spurts don’t work in this area. The really good manager does not wake up in the morning and say, ‘This is the day I’m going to cut costs,’ any more than he wakes up and decides to practice breathing."

Well I wish there could be a solution or answer to every situation in life. But what I can say is today u make mistake don't mean forever u will make the same mistake. We learn and improve.

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Any suggestion of stronger management on the local bourses?

(14-08-2017, 03:59 PM)sgmystique Wrote:

(14-08-2017, 03:00 PM)MOV Wrote: Last 3 quarters, the company have been quite focused on restructuring and streamlining costs and manpower. Therefore, it turned around and delivered bottom line despite declining revenue from OA. With a better cost structure, next stage is securing in more customers and revenue streams/programmes. New Amata factory is a good location in Thailand.

Interestingly, both Fuyu and Innotek reported similar declines in net profit but market bashes down the latter more while aceding higher valuation for Fuyu. So who is right? 

Well if you are really convinced about the management and business direction for Innotek, perhaps the market is giving you an opportunity to load up at a lower cost.

That should be a good thing I guess 

Yes turnaround take time. Beside they are in a cyclical industry and looking at current stock market situation when US stocks price is bubbled, household debt is over USD$12.8 trillions(bigger than China GDP), its a matter of time it will burst and we are into another crisis.
With such macro factor at play, can the turnaround crystallize in time?

Its risk vs opportunity. Investment is about probability and invest in the least risk company with potential good returns.

MY humble opinion: Protect your downside risk. The most riskiest risk is you do not know you don't know the risk.

Cheers

What makes me feel good about Innotek is the fact that top management has taken cognizance of the fact that the operating environment for Innotek right now is challenging and they have not been afraid to state the situation as they perceive it to be, irrespective of the effect it will have on the share price.

On the other hand what gives me hope is that they are also making proactive efforts to expand their portfolio of offerings and thus make up for whatever losses might occur in their existing business!

But as they say "Time is the Ultimate judge"  

Let's do some simple mathematics.

The number of issued shares (excluding treasury shares) is 224.125m, multiply by $0.305 (last close 18 Aug), you will get a market cap of S$68.358m. 

Based on 1H results, InnoTek has 15.816m in "held for trading financial assets" and 31.222m in "cash and short-term deposits. As for debt, it has a finance lease of 61k (both long and short term). This means the net cash position of the company is 46.98mil approximately. 

The enterprise value of the company is 21.38mil. For last twelve month, it produced 12.9mil of net profit attributable to shareholders. 

This means the P/E ex-cash is 1.66x. Should there be volatility in its earnings due to turnaround, its PE ex-cash should fluctuate between 1.2x to 2x. I believe that is a very attractive price to pay for InnoTek since the share price has fell considerably after the 1H release. A lot of the losses are contributed by non-core operational activities.

I did some quick calculations on the ROI % of the "held for trading financial assets", I do not think it is unacceptable because it is below 5% performance and the company has to pay for mgmt or performance fees.

If anyone have read the book on The Outsiders, you would know how Dr Henry Singleton grew Teledyne. He used his stock as a currency. When Teledyne's shares are trading on high-multiples, he used it to acquire good companies. When the markets are impatient and shares are trading on low-multiples, Dr Singleton wasn't shy to announce tender and aggressive buy-backs on Teledyne's shares. 

Under a scenario where InnoTek's management refocuses their efforts on manufacturing and divest their non-core financial assets, they should be able to convert its $15.816m portfolio into cash. Given the perfect scenario where it is able to buy infinite shares at $0.30, 51.86m shares could be bought back. 

For the purpose of this analysis, let's ignore the fact that a company can purchase only up to 10% of existing outstanding shares per share mandate, this would shrink its outstanding shares to 172.269m shares. 

Taking 3.1mil net profit (1H FY2017) divided by 172.269mil shares, you will get a EPS of $0.0179. Compared against existing $0.0137, that is an approx of 30% growth in EPS. 

This means purchasing its own shares provide 30% growth in EPS as compared to a meagre low digit performance provided by the appointed investment manager of its financial assets.

Is this financial engineering? This is hardly near that. Imagine I have a pizza that is split to 8 slices, now, the company buys back the slices and returns to the shareholders. This means each shareholder owns a greater portion of the slice, hence, their shares get more valuable. Shareholders should be happy. However, there is a limit and shrewd capital allocators would do it only when shares are undervalued. This reminds me that Wells Fargo did buy back until Buffett's Berkshire's stake in the bank had climbed above 10%. it triggered Fed restrictions and Buffett had to sell.
 
When faced with the choice whether to pay out dividends or buy back shares, a company should buy back shares when the company is undervalued. A company’s shares that are bought back, it is forever taken out of the market (unless re-issued for ESOS), making it EPS-accretive and a company can save on future dividends. Share-buy backs would deliver a more permanent and credible boost to EPS, and henceforth, the share price. 

When InnoTek resolved its operational issue, there is a double engine boost in EPS coming from share buy-backs and increased profitability after the Thailand factory is up. That's only a IF and it is not a certainty. We have to be conscious of both sides and assess the risk-return ratio.

That being said, InnoTek does not have a share buy-back mandate currently. It will need to seek one. The last mandate was obtained in 2014 or 2015's EGM. Can't remember. There are risks in InnoTek as we are all aware, however, I do not rule out the chance when shrewd private equity would come in to acquire them, leverage them up, then restructure their operations using their capital resources and operational know-how... subsequently, improve profitability and sell at a higher price multiple and net a high IRR. 

- vested -

(18-08-2017, 08:49 PM)kelvesy Wrote: Let's do some simple mathematics.

The number of issued shares (excluding treasury shares) is 224.125m, multiply by $0.305 (last close 18 Aug), you will get a market cap of S$68.358m. 

Based on 1H results, InnoTek has 15.816m in "held for trading financial assets" and 31.222m in "cash and short-term deposits. As for debt, it has a finance lease of 61k (both long and short term). This means the net cash position of the company is 46.98mil approximately. 

The enterprise value of the company is 21.38mil. For last twelve month, it produced 12.9mil of net profit attributable to shareholders. 

This means the P/E ex-cash is 1.66x. Should there be volatility in its earnings due to turnaround, its PE ex-cash should fluctuate between 1.2x to 2x. I believe that is a very attractive price to pay for InnoTek since the share price has fell considerably after the 1H release. A lot of the losses are contributed by non-core operational activities.

I did some quick calculations on the ROI % of the "held for trading financial assets", I do not think it is unacceptable because it is below 5% performance and the company has to pay for mgmt or performance fees.

If anyone have read the book on The Outsiders, you would know how Dr Henry Singleton grew Teledyne. He used his stock as a currency. When Teledyne's shares are trading on high-multiples, he used it to acquire good companies. When the markets are impatient and shares are trading on low-multiples, Dr Singleton wasn't shy to announce tender and aggressive buy-backs on Teledyne's shares. 

Under a scenario where InnoTek's management refocuses their efforts on manufacturing and divest their non-core financial assets, they should be able to convert its $15.816m portfolio into cash. Given the perfect scenario where it is able to buy infinite shares at $0.30, 51.86m shares could be bought back. 

For the purpose of this analysis, let's ignore the fact that a company can purchase only up to 10% of existing outstanding shares per share mandate, this would shrink its outstanding shares to 172.269m shares. 

Taking 3.1mil net profit (1H FY2017) divided by 172.269mil shares, you will get a EPS of $0.0179. Compared against existing $0.0137, that is an approx of 30% growth in EPS. 

This means purchasing its own shares provide 30% growth in EPS as compared to a meagre low digit performance provided by the appointed investment manager of its financial assets.

Is this financial engineering? This is hardly near that. Imagine I have a pizza that is split to 8 slices, now, the company buys back the slices and returns to the shareholders. This means each shareholder owns a greater portion of the slice, hence, their shares get more valuable. Shareholders should be happy. However, there is a limit and shrewd capital allocators would do it only when shares are undervalued. This reminds me that Wells Fargo did buy back until Buffett's Berkshire's stake in the bank had climbed above 10%. it triggered Fed restrictions and Buffett had to sell.
 
When faced with the choice whether to pay out dividends or buy back shares, a company should buy back shares when the company is undervalued. A company’s shares that are bought back, it is forever taken out of the market (unless re-issued for ESOS), making it EPS-accretive and a company can save on future dividends. Share-buy backs would deliver a more permanent and credible boost to EPS, and henceforth, the share price. 

When InnoTek resolved its operational issue, there is a double engine boost in EPS coming from share buy-backs and increased profitability after the Thailand factory is up. That's only a IF and it is not a certainty. We have to be conscious of both sides and assess the risk-return ratio.

That being said, InnoTek does not have a share buy-back mandate currently. It will need to seek one. The last mandate was obtained in 2014 or 2015's EGM. Can't remember. There are risks in InnoTek as we are all aware, however, I do not rule out the chance when shrewd private equity would come in to acquire them, leverage them up, then restructure their operations using their capital resources and operational know-how... subsequently, improve profitability and sell at a higher price multiple and net a high IRR. 

- vested -

I could not have put it better. This line of thinking got me to increase my stake since 2Q17 results were declared.

As long as management remains honest and committed to the welfare of shareholders, I feel the current price is a good one to continue a slow accumulation!

(18-08-2017, 08:49 PM)kelvesy Wrote: Based on 1H results, InnoTek has 15.816m in "held for trading financial assets" and 31.222m in "cash and short-term deposits. As for debt, it has a finance lease of 61k (both long and short term). This means the net cash position of the company is 46.98mil approximately.

The company has another $19.2m in investment properties. If you add that in, the net cash + investment property is almost equal to the market cap (ie. the EV is almost 0, or the business is free). During the last AGM, the Board has expressed that it is cognizant of this huge non-operating assets. I think this is a huge comfort to minorities holding on.

kelvesy Wrote:I do not rule out the chance when shrewd private equity would come in to acquire them...

Gazelle Capital (Lim Say Hui of Lindeteves Jacoberg, now known as Brook Crompton) did come in. IIRC, they tried to work something out with the Chandaria's a few years ago, but got nowhere.

My personal opinion is that Innotek should not have hired an investment bank manager to manage its 15 mil securities. A reason is because it seems the investment manager has not been performing to par.

The second reason is that Innotek can deploy the cash for better uses and that includes doing share buybacks of its own shares or using it as a cash buffer. The fact that you can buy Innotek assets of NAV 55 cents at a price of 35 cents, point to a potential 50% gain. From a business acquisition perspective, you are buying a business which is generating about 8% FCF yearly; much better than putting your 15 mil with an investment banker who is unlikely to provide you 8% returns after fees.