Identifying the next takeover target for SGX-listed technology stocks

As technology stocks generally offer good earnings growth and/or inexpensive valuations, several of these companies that were previously listed on the SGX had been acquired and privatised as seen in the table below which depicts the various takeover valuations of SGX-listed tech counters that had received takeover offers during the last few years.

List of SGX-listed tech counters that had received takeover offers

Lim & Tan Research had correctly highlighted that Memtech Int’l, Sunningdale Tech were potential takeover targets along with semiconductor equipment maker Manufacturing Integration Technology, where the latter had disposed of its core semiconductor business for S$84mln and distributed the ensuing proceeds as special dividends that resulted in a windfall for its shareholders, which is akin to a privatisation outcome for its retail investors in all but name.

As seen in the table below, we believe that these three SGX-listed technology companies could be the next privatisation targets. Moreover, given their good earnings growth prospects, robust balance sheets and low valuations, we opine that investors could seek exposure in these fundamentally strong tech stocks while waiting for a potential takeover offer.

SGX-listed tech counters that are potential takeover targets

Broadway Industrial (TP:S$0.30, 62% upside from current level) – Broadway is a key provider of actuator arms, assemblies and other related parts mainly for the global hard disk drive (HDD) industry. Riding on the growth of data storage facilities worldwide, we believe that Broadway is slated to continue benefitting from this global phenomenon and that its prospects are bullish.

Read more about Broadway

Innotek (TP:S$1.19, 63% upside from current level) – Innotek is a precision metal components manufacturer serving the consumer electronics, office automation and automotive industries. Given the global trend where full autonomous driving is within reach in the near future and where electric vehicles are getting more commonplace, we therefore opine that Innotek is well-placed to capitalise on such trends given that it serves the automotive sector.

Read more about Innotek

Spindex Industries (TP:S$1.45, 16% upside from current level) – Spindex is a provider of machined components for the Imaging & Printing and Machinery & Automotive Systems sectors. Despite the Movement Control Order that was enacted by the Malaysian government earlier this year, the company still managed to register a 75% growth in FY21 net profit over FY20, a testament to its ability to continuously re-invent itself to be at the forefront of today’s global marketplace.

Read more about Spindex

Broadway Industrial (B69)

Broadway Industrial (TP:S$0.30, 62% upside from current level) – Broadway is a key provider of actuator arms, assemblies and other related parts mainly for the global hard disk drive (HDD) industry. Riding on the growth of data storage facilities worldwide, we believe that Broadway is slated to continue benefitting from this global phenomenon and that its prospects are bullish.

1. Potential M&A target

Broadway had previously received a takeover offer from Seksun Group in 2020 to sell its HDD business to the latter for US$50m, or S$67.5m which equates to S$0.144 per share. Notably, this US$50m excludes Broadway’s factory in Shenzhen. Also, the Net Asset Value of Broadway’s Shenzhen factory is around S$17m (or S$0.0363 per share), while its revised Net Asset Value is around S$45m (or S$0.0961 per share).

However, Broadway had terminated this purchase offer by Seksun in Jul-21, which effectively values Broadway at S$0.24 (S$0.144 plus S$0.0961) or 1.3x P/B. We believe that Broadway rejected this offer eventually as the offer was not attractive, while its HDD business was also picking up steam due to the entry of Mr Lek Yew Sen whom was recruited from one of its competitors.

2. Earnings growth and low valuations

Broadway had recruited Mr Lek Yew Sen (currently SVP of Operations of Broadway) from its competitor, Belton Technology, to drive Broadway’s HDD business in Sep-19. Additionally, Broadway may also be gaining market share from another of its competitor, JCY Int’l, as the latter had announced that it lost a major customer back in Jan-21.

Also, Broadway is working on its new actuator arm product, the dual actuator arm, which is expected to command higher margins as compared to its old single actuator arm product. This is forecasted to help drive growth going forward. All in, we are expecting Broadway to register net earnings growth of 13.8% to hit FY21F net profit of S$16.1m from FY20 net profit of S$14.1m.

As compared to the industry average of 16.4x forward P/E and 3.3x P/B, Broadway is attractively valued at 6.1x forward P/E and 1.2x P/B. Our target price for Broadway stands at S$0.30 based on 8.8x FY21F P/E, which represents almost a 50% discount to the industry average of 16.4x P/E. Also, Broadway is currently in a net cash position of S$8.1m which equates to 8.2% of present market cap.

3. Share buybacks and insider purchases seen as a sign of confidence in the company’s prospects

Broadway started to engage in share buybacks recently during Oct-21, after a 27-month hiatus since Jul-19. For the entire month of Oct-21, Broadway had bought back 5.69m shares at a range of S$0.156 to S$0.200. Also, two independent directors had also recently bought 415k shares on the open market during Aug-21 at an average price of S$0.154.

Innotek (M14)

Innotek (TP:S$1.19, 63% upside from current level) – Innotek is a precision metal components manufacturer serving the consumer electronics, office automation and automotive industries. Given the global trend where full autonomous driving is within reach in the near future and where electric vehicles are getting more commonplace, we therefore opine that Innotek is well-placed to capitalise on such trends given that it serves the automotive sector.

1. Attractive valuations with earnings growth

As compared to the industry average of 16.4x forward P/E and 3.3x P/B, Innotek is attractively valued at 12x forward P/E and 1x P/B. Our target price for Innotek is S$1.19 based on 16.4x FY21F P/E, which is inline with the industry average.

Despite the global shortage of semiconductor chips and other electronic components hindering production and delaying project timelines, the auto sector in China remains resilient but growth is expected to slow down in 2H21. Driven by its automotive segment, we are expecting Innotek to register net earnings growth of 15.4% to hit FY21F net profit of S$16m from FY20 net profit of S$13.9m for the Group. Innotek had registered net profit growth of 93.8% to S$7.2m in 1H21 over 1H20.

2. Potential M&A target

For SGX-listed tech companies that recently received takeover offers, the average valuations of the various takeover offers stood at 14.7x P/E, 1.6x P/B and 6.2x EV/EBITDA. Comparatively, Innotek is attractively priced and trades at forward 12x P/E, current P/B of 1x and EV/EBITDA of 2.9x.

3. Robust balance sheet with net cash position

Innotek is presently in a net cash position of S$90.1m which equates to 46.8% of current market cap. This compares favourably with the industry average, where the various SGX-listed technology manufacturers are on average in a net cash position that equates to 17% of their respective market capitalisations.

Spindex Industries (564)

Spindex Industries (TP:S$1.45, 16% upside from current level) – Spindex is a provider of machined components for the Imaging & Printing and Machinery & Automotive Systems sectors. Despite the Movement Control Order that was enacted by the Malaysian government earlier this year, the company still managed to register a 75% growth in FY21 net profit over FY20, a testament to its ability to continuously re-invent itself to be at the forefront of today’s global marketplace.

1. Low valuations with earnings growth

As compared to the industry average of 16.4x forward P/E and 3.3x P/B, Spindex is attractively valued at 6.2x forward P/E and 1.1x P/B. Additionally, the ex-cash P/E of Spindex is also low at just 5.0x. Our target price for Spindex at S$1.45 is based on 7.2x FY22F P/E, which represents a sizable discount to the industry P/E average.

In a bid to boost earnings, Spindex has stepped up investment in new plants and additional machinery to renew and optimize its network of manufacturing facilities across Asia to better cater to business fluctuations. Driven by moderate growth across all three of its business segments, we are expecting Spindex to register net earnings growth of 9.7% to hit FY22F net profit of S$23.3m from FY21 net profit of S$21.3m for the Group.

2. Potential M&A target

Back during Feb-17, Spindex had received a takeover offer from its founding family that valued the stock at 9.9x P/E, 1.1x P/B and EV/EBITDA of 3.4x. Presently, Spindex trades at forward 6.2x P/E, current P/B of 1.1x and EV/EBITDA of 2.9x. Therefore, the founding family could be inclined to launch another privatisation offer for Spindex again, given that its present valuations are lower than what they had offered previously.

3. Strong balance sheet with net cash position

Spindex is currently in a net cash position of S$37.4m which equates to 25.9% of present market cap. This compares favourably with the industry average, where the various SGX-listed technology manufacturers are on average in a net cash position that equates to 17% of their respective market capitalisations.

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