global invacom group (rad sp) market cap: usd39.9m price: …€¦ · global invacom group (rad sp)...

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Initiating Coverage, 24 August 2015

Global Invacom Group (RAD SP) Buy Technology - Technology Target Price: SGD0.45

Market Cap: USD39.9m Price: SGD0.22

Hitting Rock Bottom But Turnaround In FY16

Macro

2.00

Risks

1.00

Growth

2.00

Value

3.00

55

63

72

80

88

97

105

0.19

0.24

0.29

0.34

0.39

0.44

0.49

Global Invacom Group (RAD SP)Price Close Relative to Straits Times Index (RHS)

5

10

15

20

25

Au

g-1

4

Oct-

14

De

c-1

4

Fe

b-1

5

Ap

r-1

5

Ju

n-1

5

Vo

l m

Source: Bloomberg

Avg Turnover (SGD/USD) 0.60m/0.44m

Cons. Upside (%) n/a

Upside (%) 105

46-wk Price low/high (SGD) 0.22 - 0.45

Free float (%) 56

Share outstanding (m) 254

Shareholders (%)

Neo Chee Beng 7.2

Investec Asset management 5.9

River & Mercantile funds 5.6

Serial System 4.5

Share Performance (%)

YTD 1m 3m 6m 12m

Absolute (46.4) (35.3) (33.3) (49.4) (46.7)

Relative (34.7) (23.4) (19.7) (35.9) (42.1)

Shariah compliant

Jarick Seet +65 6232 3891

[email protected]

Forecasts and Valuations Dec-13 Dec-14 Dec-15F Dec-16F Dec-17F

Total turnover (USDm) 116 134 159 186 219

Reported net profit (USDm) 8.0 5.1 1.7 8.3 10.8

Recurring net profit (USDm) 8.0 5.1 1.7 8.3 10.8

Recurring net profit growth (%) na (36.5) (66.5) 388.3 29.8

Recurring EPS (USD) 0.03 0.02 0.01 0.03 0.04

DPS (USD) 0.00 0.00 0.00 0.01 0.01

Recurring P/E (x) 4.5 8.3 23.4 4.8 3.7

P/B (x) 0.81 0.70 0.65 0.59 0.53

P/CF (x) 4.74 5.40 na 1.85 4.56

Dividend Yield (%) 0.0 2.2 0.0 6.3 8.1

EV/EBITDA (x) 2.04 2.77 7.51 0.81 0.40

Return on average equity (%) 19.9 9.7 2.8 12.9 15.2

Net debt to equity (%) net cash net cash net cash net cash net cash

Our vs consensus EPS (adjusted) (%) 0.0 0.0 0.0

Source: Company data, RHB

We initiate coverage on Global Invacom (GInva), a manufacturer cum supplier of satellite TV and cable peripherals products with a SGD0.45 TP (implying a FY16F P/E of 9.8x), representing 105% upside potential return and recommend BUY. We like Ginva as it operates in a sector with high barriers to entry and also it owns the patents to its products. We think the current price level and EPS hit rock-bottom and expect a strong turnaround in FY16, due to at least 1) demand surge from new satellite launches 2) potential Skyware turnaround 3) cross-selling of products and 4) a new generation product. Strong turnaround ahead. The performance in FY15 may be dragged

down by a delay in sales to its major customers, due to a change in procurement procedures as well as a few one-off costs such as the acquisition of Skyware Global (Skyware) which is currently in a loss making position. However, with its i) expected increase in demand due to major customer launching two new satellites in FY16, coupled with the fact that ii) Skyware is close to breaking even and should be profitable by FY16, as well as iii) being able to supply both dishes and LNBs to its largest customer and iv) new generation product, we expect GInva to outperform with an approximately 7x NPAT surge in FY16.

Share buy-backs to continue. The company has been aggressively

buying back its shares since FY13, partially due to its strategy of using its treasury shares to fund its M&A activities. As of 2015, the company has already bought over 26.6m shares at an average price of SGD0.36/share, ie much higher than the existing level. Going forward, the management highlighted that share buybacks will likely continue, especially if they have an acquisition target. Management also owns employee share options which have an exercise price of SGD0.31.

Serial System as a strategic partner. In June this year, Serial System

(SERL SP, NR), a proven distributor with over USD1bn of revenues in FY14, took a 4.5% stake in GInva at SGD0.29/share. Serial System will be involved in helping GInva improve procurement of components in tandem with their growth strategy, which could result in cost savings.

Initiate with BUY and SGD0.45 TP. With several positive catalysts, we

expect a strong turnaround in FY16.

Key Risks: customer concentration risk (GInva derived 86% of FY14

revenues from its top 5 customers); further risks on page 8.

http://www.efa.biz/

Global Invacom Group (RAD SP)

24 August 2015

See important disclosures at the end of this report 2

Table Of Contents Table Of Contents ....................................................................................................... 2

Investment Merits ........................................................................................................ 3

Valuation ..................................................................................................................... 6

Key Risks .................................................................................................................... 8

Financial Forecasts ................................................................................................... 14

Company Background............................................................................................... 17

Business Analysis ..................................................................................................... 20

Financial Exhibits ...................................................................................................... 22

SWOT Analysis ......................................................................................................... 24

Recommendation Chart ............................................................................................ 25


24 August 2015


Investment Merits

Increase in demand from new satellites to be launched by major customers in 2H16. Hughes, a wholly owned subsidiary of EchoStar (SATS US, NR) which is a

major customer of GInva, confirmed plans to launch a new satellite called the EchoStar 19/Jupiter 2 K-a-band broadband satellite. It is designed to relieve demand pressure on EchoStar‟s Hughes consumer satellite broadband service and is expected to be launched in 2H16. Hughes, also an existing customer of GInva is currently relying on the EchoStar 17/Jupiter 1 satellite in orbit which is running out of capacity. The new multi-spot beam K-a-band satellite will help to meet the growing demand for HughesNet Gen4 high-speed satellite Internet service in North America, with a 50% more capacity. EchoStar is also planning to launch another satellite called EchoStar 23 over Brazil that the company had won at an auction but has been yet unable to commercialize for direct-to-home television due to a lack of finding a Brazilian partner. EchoStar is proceeding with the construction of the satellite, with a planned launch in late 2016. With new satellite launches planned in 2016, GInva‟s major customers will be able to expand their capacities which are a catalyst as more subscribers would translate to more dishes and LNBs ordered from GInva.

Figure 1: EchoStar 19/Jupiter 2 K-a-band broadband satellite

Source: spacenews.com

Turnaround in 2H15 – expected an explosive growth in FY16. In 1H15, GInva

was impacted by a delay in sales to major customers located in the US, UK and countries in Asia, due to a change in their procurement procedures. However, these orders have restarted in July 2015 and may contribute to GInva‟s 2H15 performance, signaling a strong turnaround in 2H15. However, the acquisition of Skyware which is currently in a net loss position will probably drag down its FY15 NPAT. We understand that Skyware is close to breaking even; also Skyware has seen orders surge from its major customers due to a replacement cycle looming ahead and the switch to a few new generation products expected to happen in FY16. We expect Skyware to contribute positively to GInva‟s earnings from FY16 onwards.

New generation product leading replacement cycle. We learned that GInva has

been involved in R&D and manufacturing for a new generation product which is in the final stage of qualification by its customers. This would lead to a replacement cycle, especially for its major customers, which could result in a growth in demand for GInva‟s products for the next 2 to 3 years.

Able to supply largest customer with satellite dishes. Previously, GInva was

mainly supplying LNBs to its single largest customer, Echostar. With the acquisition of Skyware, GInva can now supply dishes as well, which could result in an increased revenue stream.

Adding a US manufacturing presence. With the acquisition of Skyware, GInva will

have a satellite communications production presence in the US coupled with its existing production footprint in Asia and Europe. This will allow GInva to target countries in South America which have a huge reliance on satellite for calls, TV and high speed internet.

The only global full-service outdoor unit supplier. According to the management,

after the acquisition of Skyware, GInva will be the world‟s only full-service outdoor unit supplier, providing an extensive portfolio of products from antennas and


24 August 2015


electronics to accessories; GInva can also provide both LNBs and Dishes and meet the full spectrum of the customer‟s needs.

High barriers to entry. Entering the dish business requires a lot of time, investments

and R&D efforts. It took GInva 3 years, coupled with tens of millions in investments to design a dish when it entered this segment back in 2010. In addition, a new competitor would have to go through a stringent scrutiny by broadcasters which usually takes about 1-2 years, before it could receive a substantial order. An existing dish maker such as Skyware can redesign a dish in just 3 to 6 months.

Stickiness of customers. GInva‟s customers consist mainly of network and satellite

operators and operate normally in more rural areas. Therefore, the quality of the dishes as well as the LNBs has to be good and last for a long period of time. It could be costly and a hassle for the TV network to constantly send its repair staff to their customer‟s homes, especially in a large country. As a result, customers tend to stick to their manufacturers and suppliers if these deliver on time and provide quality products.

Product range expanded - able to supply both Ka and Ku band VSAT technologies. Previously, GInva was only supplying mainly Ku-band VSAT

technologies to its customers. However, with the acquisition of Skyware, GInva now added Skyware‟s VSAT technology for the Ka-band into its portfolio of products and can now supply Ka-band related dishes and LNBs to its customers, especially in the US and Asia.

Evolution Cycle - Transition from Ku to Ka, especially in Asia. In the past few

years, there has been a growing amount of Ka-band capacity launched in many regions of the world, fueled by the growth in Internet-based applications and other wireline and wireless communications technologies. The lower Ku-band frequency capacity has filled up in most of the geosynchronous orbital slots. As a result, the growing demand for satellite bandwidth is driving investment in Ka-band as the next choice for launching new satellite capacity. In Asia, typically a Ku-band is being used at the moment and there will be a evolution cycle soon when they shift towards Ka-band which will provide higher quality, better performance and faster speed services.


24 August 2015


Share buy-backs likely to continue. The company has been aggressively buying

back its shares since FY13, partially due to its strategy of using its treasury shares to fund its M&A activities. As of 2015, GInva has already bought over 26.6m shares at an average price of SGD0.36/share. Going forward, the management highlighted that share buybacks will likely continue as they are also optimistic on a strong turnaround and believe that their company is deeply undervalued. Management also owns some employee share options which have an exercise price of SGD0.31.

Figure 2: Share Buy Back

Date Number of

shares

Price

(SGD)

Total Total Consideraton (SGD)

16/10/2013 800,000 0.197 157,600 158,101.68

17/10/2013 800,000 0.198 158,400 158,904.23

18/10/2013 1,000,000 0.197 196,954 197,580.98

21/10/2013 1,400,000 0.197 275,778 276,655.47

22/10/2013 620,000 0.199 123,410 123,802.61

23/10/2013 400,000 0.205 82,000 82,392.64

24/10/2013 410,000 0.205 84,100 84,502.72

28/10/2013 570,000 0.204 116,508 116,878.87

Total Share Buy Back for Year 2013 6,000,000 0.20 1,198,819

2/9/2014 620,000 0.445 275,900 276,756.12

3/9/2014 700,000 0.443 309,810 310,961.83

4/9/2014 610,000 0.440 268,400 269,232.85

5/9/2014 700,000 0.440 308,000 308,955.73

8/9/2014 700,000 0.440 308,000 308,955.73

9/9/2014 243,000 0.440 106,920 107,251.76

10/9/2014 260,000 0.440 114,400 114,754.98

15/9/2014 354,000 0.439 155,490 155,972.39

8/10/2014 800,000 0.395 316,000 316,980.55

9/10/2014 794,000 0.394 313,170 314,142.05

13/10/2014 800,000 0.405 324,000 325,005.37

14/10/2014 792,000 0.395 312,770 313,740.84


9/1/2015 1,000,000 0.395 394,900 396,125.37

12/1/2015 1,000,000 0.390 390,000 391,210.17

13/1/2015 1,000,000 0.390 390,000 391,210.17

14/1/2015 960,000 0.385 369,600 370,746.87

15/1/2015 1,000,000 0.390 390,000 391,210.17

16/1/2015 1,000,000 0.395 395,000 396,225.69

19/1/2015 650,000 0.385 250,250 251,026.52

21/1/2015 2,000,000 0.389 778,000 780,414.14

22/1/2015 2,000,000 0.395 790,000 792,451.37

23/1/2015 1,000,000 0.400 400,000 401,241.20

3/6/2015 2,000,000 0.338 675,680 677,776.63

5/6/2015 1,004,900 0.315 316,544 317,525.73

22/6/2015 12,000,000 0.341 4,091,496 4,104,195.93


Grand Total Share Buy Back for Years 2013-2015 39,987,900 0.35 13,982,889

Source: RHB estimates


24 August 2015


Valuation

Initiating coverage with a BUY and a SGD TP0.45.

We initiate coverage on GInva with a BUY and a TP of SGD0.45, based on a 9.8x FY16F P/E.

We forecast recurring net profit after tax (NPAT) to grow at a c.25% CAGR to SGD8.3m in FY16F from SGD5.1m in FY14. Its global listed peers are trading at an average of 19.6x FY15F P/E (Figure 3). Due to the relatively smaller scale of the company when compared with its global peers, lower liquidity of the company as well as potential lumpy earnings recognition, we ascribed a 50% discount to its peer average to arrive at our 9.8x FY16F P/E. Our TP of SGD0.45 represents a potential upside of c.105% from its current trading price. Our TP is also backed by a conservative DCF-backed valuation of SGD0.46 (Figure 4)

Figure 3: Peer Comparison

Name TickerMkt Cap

(SGDm)FY15F P/E (x) FY15F P/B (x) Net Gearing (%)

FY15F Dividend

Yield (%)ROE (%)

Global Invacom Group Ltd* RAD SP Equity 79 58.0 0.9 -34.2 1.8 9.7

CalAmp Corp CAMP US Equity 864 30.0 4.6 -28.8 N/A 19.3

Wistron NeWeb Corp 6285 TT Equity 1135 13.6 2.2 -30.5 5.3 17.3

Zinwell Corp 2485 TT Equity 480 11.9 1.4 -49.0 N/A N/A

Prime Electronics Satellitics Inc 6152 TT Equity 69 23.0 0.5 3.6 N/A N/A

Average excluding Global Invacom 19.6 2.2 -26.2 5.3 18.3 Source: RHB estimates*, Bloomberg

A strong boost in FY16F. With new satellites to be launched in FY16, coupled with

the potential strong turnaround in its latest acquisition (Skyware) and the likely cross-selling of Skyware‟s technologies to its existing customers, especially on providing dishes to its existing single largest customer in the U.S, we expect earnings to bounce back substantially in FY16F.

Strong balance sheet affirms stability and allows potential further M&A growth.

As GInva is in a strong net cash position, it will probably continue to look for private M&A targets that complement its business model. In addition, its M&A targets could also enable access to new technology, markets, customers and businesses. However, management highlighted that they will first digest its latest acquisition before making another one of similar nature.


24 August 2015


Corroborated by a DCF-derived TP of SGD0.46 TP

DCF-derived TP of SGD0.46 with a 12% WACC. We back our 9.8x FY16 P/E TP of

SGD0.45 with a DCF-based SGD0.46 TP. The assumptions are listed below:

i. We apply a risk-free rate of 2.5% from the 10-year average yield of the 10-year Singapore Government bonds

ii. Expected market return is 10%, based on Bloomberg‟s 10‐year average

return of the Singapore market

iii. Beta of 1.0

iv. We assume a terminal growth rate (TG) of 0%

Figure 4: GInva’s DCF Valuation

USD(m) Total (USDm) FY15F FY16F FY17F FY18F FY19F Terminal Value

EBIT 1.8 9.0 11.7 12.0 13.1

EBIT(1-T) 1.7 8.3 10.8 11.1 12.2

Less: Capex (2.0) (5.0) (2.0) (2.0) (2.0)

Add: Depreciation & Amortisation 1.6 2.1 2.1 2.1 2.1

Less: Change in Non-cash WC (5.7) 11.1 (4.2) (2.3) (2.6)

FCFF (4.4) 16.6 6.7 8.9 9.6 80.0

Present value of FCFF (3.9) 13.2 4.8 5.6 5.4 45.4

Total FCFF 71

Add : Cash (with IPO proceeds) 14

Less: Value of Debt 0

Target Equity Value 84

No.of shares 254.4

USD/SGD 1.4

Intrinsic Share Price (SGD) 0.46 Source: RHB estimates

Scenario Analysis Base-case scenario: we assume a 20% growth rate for satellite communications

and a 5% growth rate for contract manufacturing in FY16. In addition, we also expect gross margins to recover back to 25% and 10% for both Satellite communications and Contract manufacturing respectively.

Worst case we assume a 0% growth rate for satellite communications and a 0%

growth rate for contract manufacturing in FY16. In addition, we also expect gross margins to recover maintain at 22% and 10% for both Satellite communications and Contract manufacturing respectively.

Best case, we assume a 30% growth rate for satellite communications and a 10%

growth rate for contract manufacturing in FY16. In addition, we also expect gross margins to recover maintain at 27% and 10% for both Satellite communications and Contract manufacturing respectively.

Figure 5: Scenario Analysis

Worst Case Base Case Best Case

Satellite Communications growth rate (%) 0 20 30

Contract Manufacturing growth rate (%) 0 10 10

Satellite Communications gross margins (%) 22 25 27

Contract Manufacturing gross margins (%) 10 10 10

Net Profit (USDm) 2.8 8.3 13.3

FY16 P/E (x) 14.2 4.8 3

Target Price (SGD) 0.15 0.45 0.72 Source: RHB estimates


24 August 2015


Key Risks Customer concentration risk. GInva derived 85.7% of FY14 revenue from its top 5

customers. In particular, 46% of FY14 revenue came from its major customer Echostar. A change in business strategy that reduces Echostar‟s reliance on GInva, or a rise/drop in the financial performance by other major customers would likely have a noticeable impact on GInva‟s revenue.

Currency risk. While GInva revenue is reported in USD, only half of the material

costs are in USD terms, as the remainder is in local currency. As the company conducts activities around the world (Figure 6), it has exposure to MYR, SGD and GBP. Therefore, the recent weakening of the MYR against the USD would have reduced revenues and raised the costs of the manufacturing activities in Malaysia. Conversely, a weaker USD would have a positive impact on the company‟s activities outside the US.

Figure 6: Global Invacom’s global activities

Source: RHB, Company data

Weak adoption of emerging satellite technologies. The latest trend in pay TV is

the increasing demand for high definition content, which is expected to drive sales of GInva‟s customers such as the pay TV provider Astro and set top box provider Echostar. Therefore, lagging adoption in the key markets for these customers would in turn, slow down sales of GInva.

Execution risk – M&A. The company recently acquired Skyware which is still in a

lost making position. However, it remains to be seen if the acquisition will be accretive to the company‟s bottom line, without an observable full year trend. In addition, there is also an execution risk to turn the company around for it to be accretive towards GInva‟s bottomline. The company stated it would be actively seeking inorganic growth opportunities to consolidate smaller independent companies to expand into new markets, technologies and customers. This carries numerous risks as not all companies may end up being accretive towards GInva‟s profits.


24 August 2015


Industry Outlook

Growing Satellite Industry. According to the Satellite Industry Association (SIA), the

industry grew by 4% YoY to USD$203bn in 2014, which is higher than the global economic growth of 2.6% in 2014, as seen in Figure 7. This grow was mainly attributed to the growth in satellite services, launch industry and ground equipment. According to Futron‟s 2013 forecast, the industry is forecasted to grow by 6% annually till 2021 as demand for readily available data and heavy reliance on telecommunications network to connect people and businesses will only increase as the world becomes more interconnected. Figure 7: Global Satellite Industry Revenues

Source: Satellite Industry Association 2015

Satellite services growth driver. The main 2 drivers for the growth in the industry

are the satellite services and ground equipment. Satellite services (Figure 8) which counts consumer services such as satellite TV Services and Satellite Broadband as its main revenue contributors is expected to continue to grow going forward as consumers demand HD Quality Television content and faster internet broadband speed. Meanwhile as shown in Figure 10 revenue from consumer equipment for Non-Global Navigation Satellite System (GNSS) grew by 15% YoY to USD$17.9bn. We expect this segment to continue growing in the future as the demand for better entertainment quality and content will drive the needs for the related equipment. Figure 8: Satellite Services Revenue Breakdown



24 August 2015


Figure 9: Broadband Satellite Bandwidth Demand by Market Segment

Source: NSR 2015

Figure 10: Revenue from Global Satellite Ground Equipment


Ka-band growth. As mentioned-above, the demand for satellite industry is growing

but the existing C-Band and Ku-band infrastructure is inadequate to support this growth. According to Newsat (2012), Ka-band is the future for the satellite industry due to the diminishing and saturation of the capacity of the existing C and Ku-band. Ka-band is likely to transform the satellite industry in a similar fashion as the C-Band and Ku-band did decades ago. Ka-band is likely the heir of the Ku-band and as with any new technologies born, it will develop to be the main choice for satellite communications worldwide. Further, Futron‟s 2013 report forecasted that Ka-band service demand will grow 22% CAGR till 2021, compared to 2.5% CAGR for C-band and Ku-band over the same period. Please refer to the table in Figure 11 for the main differences between Ka-band and Ku-band.


24 August 2015


Figure 11: Main differences between Ka-band and Ku-Band

Ku-band Ka-band

Popularity Well established as the primary spectrum used for mobility networks

The spectrum has not been widely adopted by satellite operators due to its susceptibility to interference from rain and other weather conditions

Frequency (The higher

the frequency the more bandwidth you can squeeze out of the system)

12–18 GHz part of the of the microwave band of the electromagnetic spectrum

26.5–40 GHz part of the of the microwave band of the electromagnetic spectrum

Connection speeds [megabits per second (Mbps)] The headline bandwidth figure usually refers to the transponder bandwidth from the satellites, which need to be shared amongst users

1–2 Mbps 33-50 Mbps

Rain fade rate (decibel (dB)) refers

primarily to the absorption of a microwave radio frequency (RF) signal by atmospheric rain, snow or ice, and losses which are especially prevalent at frequencies above 11 GHz

1dB/sec around 3-5dB/sec

Beam-Technology Wide beams Multi- Spot beam technology

Transponders 27MHz to 54MHz Ku-band transponders

Implement wideband transponders (300MHz – 600MHz)

Antennas Smaller in size than Ku comparable but able to transmit the same transmit gain

Availability (geographical)

Ku has witnessed insatiable demand for global broadband services in recent years, and in some geographical regions the available capacity has become exhausted for particular application requirements. At the same time, Indonesia which has high rain precipitation also uses Ku-Band

Currently, Ka-band services are not as globally available as Ku

Application usage Well established as the primary spectrum used for mobility networks

Media Broadcast, Military

Affected by weather (rain fade and high levels of humidity)

Less More

Source: RHB Data

Increasing demand for data. The primary reason for Ka-band development is due

to the increasing demand for capacity as a result of the need for internet connectivity worldwide across various markets-users such as governments, businesses, media, military and private citizens. Ka-band spectrum ranges from 26.5 - 40GHz, which is an „uncharted territory‟ as the C-band and Ku-band operate at 4 - 8GHz and 12 - 18GHz respectively. This coupled with the use of numerous spot beams allows for much superior frequency reuse, thereby escalating the amount of data throughput that can be achieved. Hence, there is an increasing investments being made for dedicated Ka-band satellites and equipments.


24 August 2015


Figure 12: C-band satellite coverage area

Source: NewSat

Figure 13: Ku-band satellite coverage area

Source: NewSat

Figure 14: Ka-band satellite coverage area

Source: NewSat

Bandwidth: 1GHz Beams: 2 hemi

Bandwidth: 3GHz Beams: 2 regional 4 large spot

Bandwidth: 24GHz Beams: 2 regional 2 steerable 20 multi-spot


24 August 2015


Better connectivity and greater data. Using the new Ka-band satellites, customers

are able to have access to greater data, faster network connection speed as well as smaller end-user antennas (VSATs) which allows for a better cost-effective network utilization (Newsat 2012). Further, given the increasingly large investments – both in fixed and mobile terminals - made into this „new‟ satellite by companies such as WildBlue, ViaSat and Hughes, decreased the prices of terminal equipment required. Satellite (2015), forecasted that more than 430 satellites with High Throughput Satellites (HTS) will be built over the next 10 years to meet the growing demand of data required by the telecommunication operators. Smaller antennas. One of the major innovations of Ka-band is the smaller antenna

size relative to its predecessor (Newsat 2012). For example, a 80-100cm diameter Ka-band antenna is equivalent to a 1.8m diameter of Ku-band‟s. This results in cost savings and lower installation costs for suppliers and network operators, thereby lowering the overall cost of network installation. This development, along with increasing mobility and higher bandwidth makes Ka-band an attractive proposition for many industries such as those operating in remote areas - oil and gas exploration and production as well as mining - and also for disaster response.


24 August 2015


Financial Forecasts Turnaround of Skyware. We understand that Skyware is close to breaking even in

its recent quarters and has seen orders surge from its major customers due to the replacement and procurement cycle and the switch to a few new generation products expected to happen in FY16. In addition, we expect GInva to improve operational efficiency as well as the restructuring of the management team of Skyware to drive cost savings of USD2-3m on this front. All in all, we expect Skyware to contribute positively to its earnings from FY16 onwards.

Acquisition synergies and cost savings with Skyware global. With the

acquisition of Skyware set to be completed by the end of FY15, we expect management to focus on integrating the North Carolina plant with its global manufacturing footprint and streamlining the U.S supply chain and procurement at the same time. We expect the management team to focus on i) streamlining more processes, ii) improve efficiency, and iii) undertake more cost-cutting measures to improve its gross margins for the overall business. Bullish topline growth going forward. The acquisition of Skyware would add an

addition of USD50m to GInva‟s topline in FY15. Also it will actually support GInva with the ability to manufacture and design Ka-Band dishes, enabling them to supply to their single largest customer the full-service outdoor unit comprising of both Dishes and LNBS. This may be a potential huge growth area for GInva to tap into. Secondly, it provides GInva with Ka-band VSAT terminal related products, opening them to a whole new Ka-Band market, especially in Asia. All in all, we expect revenue to conservatively grow by 18% in FY15 due to the acquisition of Skyware and another 17% in FY16.

Figure 15: Breakdown of revenue (USDm)

Title:

Source:

Please fill in the values above to have them entered in your report

62.092.9 106.3

130.7156.8

188.112.7

22.927.9

28.1

29.5

31.0

18.8%

25.2%23.7%

20.7%23.0%

23.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0.0

50.0

100.0

150.0

200.0

250.0

FY12 FY13 FY14 FY15F FY16F FY17F

Sat Comms (USDm) (LHS)

Contract Manufacturing (USDm) (LHS)

Gross Prof it Margin (%) (RHS)


Figure 16: Sat Communications and Contract Manufacturing growth rate (%)

Title:

Source:


50%

14%

23%20% 20%

80%

22%

1%5% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

FY13 FY14 FY15F FY16F FY17F

Sat Comms Growth (%) Contract Manufacturing Growth (%)



24 August 2015


Positive effects from acquisition synergies and replacement cycle. We expect

acquisition synergies to be realized in FY16, as well as potential savings from the restructuring of Skyware‟s management team and improving operational efficiencies. In addition, the cross selling of Skyware‟s products to GInva‟s existing clients will help contribute positively to its margins.

Figure 17: Global Invacom's GP and GPMs

Title:

Source:


14.1

29.2 31.8 32.9

42.9

52.0

18.8%

25.2%23.7%

20.7%

23.0%

23.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0.0

10.0

20.0

30.0

40.0

50.0

60.0


Gross Prof it (USDm) (LHS) Gross Prof it Margin (%) (RHS)


Figure 18: Global Invacom's gross and net margins (%)

Title:

Source:


25.2%23.7%

20.7%

23.0% 23.7%

6.9%

3.8%

1.1%

4.5% 4.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

FY13 FY14 FY15F FY16F FY17F

Gross Prof it Margin (%) Net Margins (%)



24 August 2015


Strong balance sheet – Net cash position. Historically, GInva has been keeping a

strong balance sheet since FY11, with minimal borrowings and a strong net cash position. As of FY14, it has pared down all its debt and has effectively zero borrowings despite making a few acquisitions over the years. This may downplay any fears of the expected raise of the Fed rates affecting their business and profitability. In addition, the dual listing on the AIM market in July 2014 which raised USD15m in gross proceeds, has further strengthened the balance sheet and enabled them to buy Skyware without raising any debt to fund the acquisition.

Figure 19: Net Cash Position (USDm)

Title:

Source:


20.2

14.5

21.2

13.8

30.9

34.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0


Net Cash Position (USDm)


Figure 20: Net cash from operating activities and capex (USDm)

Title:

Source:


-2.9

7.7 7.8

-2.4

21.6

8.7

-1.22-2.40 -1.98

-5.0

-2.0 -2.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0


Net cash f rom operating activities (USDm) Capex (USDm)



24 August 2015


Company Background Recently listed with rich history. GInva is a manufacturer and supplier of satellite

TV and cable peripherals products. In addition, it carries out electronics manufacturing services in China. The company was formed in 2008 through the merger of Global Communications (UK) Ltd and Invacom Ltd, both of which had extremely rich histories of pioneering breakthrough technologies such as multi-switches, band and channel stackers and frequency extenders/converters. GInva was listed on the Singapore Stock Exchange through the reverse takeover of Radiance Group in 2012, and recently achieved a dual listing by successfully listing on the London AIM Market, raising SGD18.7m in the process.

Figure 21: Key Milestones

Year Event

1985 Global Communications was founded by Roger and Helen Pannell.

1988 Global Communications manufactures the first Multi-Switch.

1993 Global Communications manufactures the first ADX frequency extender.

1998 Global Communications invents tvLINKs for BSkyB.

2000 Invacom is founded by ex-employees of Marconi Company.

2001 1 million tvLINKs sold. Launched the world‟s first integrated Very Small Aperture Terminal Low

Noise Blocker.

2006 Founders Roger and Helen go on sabbatical and appoint Anthony Brian Taylor as the new

Managing Director.

2008 Global Communications (UK) Ltd and Invacom Ltd form Global Invacom.

2010 Purchased controlling interest in Radiance Group. Commenced Dish Manufacturing.

2012 Listed on Singapore Exchange following reverse takeover of Radiance. Purchased The Waveguide

Solution Limited.

2013 Purchased and renamed Raven Manufacturing Limited to Global Invacom Manufacturing (UK)

Limited.

2014 Dual listed on London AIM Market Source: RHB, Company data

Suppliers in a complex chain. GInva‟s products are utilised in a variety of

businesses such as broadcasting, building developing and electrical contracting. Their products include low noise blocks (LNB), satellite antennas and very small aperture terminals. They serve the uplink station and dish & LNB sectors of the satellite communications operations process through their two operating segments, contract manufacturing and satellite communications. They have a global presence, with manufacturing activities in the UK, logistical activities in the US and contract manufacturing in China, while being headquartered in Singapore.

Figure 22: Process of sending signal via satellite



24 August 2015


Figure 23: GInva structure


Figure 24: Process Chain

Source: Company


24 August 2015


Handpicked successor. GInva is led by Anthony Brian Taylor, its Chairman.

Appointed in 2006 by founders Roger and Helen Pannell to be the Managing Director of Global Communications, he has steadily grown the company, overseeing the merger of Global Communications (UK) Ltd and Invacom Ltd, the reverse takeover of Radiance Group and the dual listing on the AIM Market in London. He is assisted by a capable management team who has more than 20 years of experience in the satellite communications industry.

Figure 25: Board of Directors

Name Appointment Responsibility

Anthony Brian Taylor Executive Chairman Mr Taylor is the Managing Director of Global Invacom Limited and is also a director of Global Invacom Holdings

Limited. He has worked for international high technology businesses in senior executive leadership roles for over

15 years. He holds a Bachelor of Science, Electronics degree (with Honours) from Coventry University in the

United Kingdom.

Matthew Jonathan Garner Executive Director Mr Garner has extensive financial and commercial management experience of over 25 years. He holds a Degree

in Law with Honours from the University of Liverpool from 1987.

Malcolm John Burrell Executive Director Mr Burrell is a Chartered Engineer with 32 years of RF design, technical management and corporate

management experience. Mr Burrell holds a Bachelor of Science Engineering (Electronic Engineering) degree

from the University of Southampton in the United Kingdom and a Certificate in Management (CIM).

Cosimo Borrelli Independent Director Mr Borrelli is a Chartered Accountant with over 24 years of experience in formal and informal corporate

restructuring, forensic accounting and financial investigations. Mr Borrelli holds a Bachelor's degree in Economics

from the University of Adelaide, Australia.

Basil Chan Non-Executive Director Mr Chan has more than 32 years of audit, financial and general management experience. He holds a Bachelor of

Science (Economics) Honours degree majoring in Business Administration from the University of Wales Institute

of Science and Technology, United Kingdom

John Lim Yew Kong Lead Independent Director Mr Lim is currently a director of Point Hope Pte Ltd, and an independent non-executive director of Karin

Technology Holdings Limited and North Asia Resources Holdings Limited. Mr Lim graduated with a Bachelor's

Degree in Economics from the London School of Economics and Political Science in the England. Source: RHB, Company data

Figure 26: Key Management Team

Name Appointment Responsibility

Andrew Scott Martin Financial Controller Mr Martin is responsible for the overall financial management of the Company‟s operations in United

Kingdom and Israel. He holds a Diploma in Accounting from the Association of Accounting Technicians.

Gordon Blaikie Group Operations Director Mr Blaikie is responsible for the Group‟s operations in Accrington, Malaysia and Shanghai. He has 31

years of experience in manufacturing and operations and was previously the Operations Manager for

Amazon. He holds a Diploma in Production and Inventory Management Control.

David Gerald Smith Technical Director Mr Smith is responsible for the development of low noise block and very small aperture terminal products.

He has been with Invacom Limited and GIL for more than 10 years. Mr Smith holds a Bachelor with

Honours in Electronic and Electrical Engineering from the University of Leeds.

David Jonathan Wren Fugeman Sales & Marketing Director Mr Fugeman is responsible for all Satellite Communication sales to Pay TV providers, broadband by

satellite providers and major Original Equipment Manufacturers. He has been with Global Invacom Limited

for over 24 years.

Jan Treiber Head of Strategic Marketing Mr Treiber is responsible for the Group‟s strategy, internal or external intelligence and special strategic

projects. He holds a Master‟s degree in Telecommunications Engineering from Karlsruhe Institute of

Technology (KIT) in Germany and a Master of Business Administration from Collège des Ingénieurs in

France.

Wendy Isabel Wong Pei Fern Group Financial Controller Ms Wong is responsible for the overall financial, accounting and compliance matters of the group. She

has been in the finance and accounting field for more than 19 years. She holds a Bachelor‟s degree in

Accountancy from Nanyang Technological University, Singapore. Source: RHB, Company data


24 August 2015


Business Analysis

Satellite Communications

Main revenue component. Satellite Communications (Sat Comms) contributes the

majority of GInva revenue, with 79.2% of FY14 revenue coming from this segment. The activities of this segment include the development, design and manufacture of products for the satellite TV market. The main sales driver comes from direct broadcast satellite (DBS) equipment, such as switches, LNBs, and satellite dishes. In FY14, sales of DBS equipment contributed 60.6% to overall FY14 revenue, and showed the strongest growth within the segment, which also includes sales from recently acquired subsidiaries The Waveguide Solution, a microwave waveguide transmission specialist and OnePath Networks, a pioneer in the Radio Frequency over fibre technology.

Figure 27: Sat Comms and overall gross margins (%)

Title:

Source:


21%

29%27%

23%

26% 26%

19%

25%24%

21%23% 24%

0%

5%

10%

15%

20%

25%

30%

35%


Sat Comms (%) Overall (%)


Figure 28: Low Noise Block


Figure 29: Very Small Aperture Terminal



24 August 2015


Contract Manufacturing

Handles a high variety mix of products. GInva has a contract manufacturing

facility in Shenzhen, China that caters to Original Equipment Manufacturing (OEM) and Original Design Manufacturing (ODM). In addition to manufacturing the customer‟s product, the facility is capable of carrying out product design, prototyping and testing. The factory has been designed to handle high-mix orders of varying volumes, ranging from hundreds to hundreds of thousands. In FY14, this segment made up 20.8% of revenue.

Figure 30: Contract Manufacturing and overall gross margins (%)

Title:

Source:


10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

19%

25%24%

21%

23% 24%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%


Contract Manufacturing Overall Gross Margins (%)



24 August 2015


Financial Exhibits

Profit & Loss (USDm) Dec-13 Dec-14 Dec-15F Dec-16F Dec-17F

Total turnover 116 134 159 186 219

Cost of sales (87) (102) (126) (143) (167)

Gross profit 29 32 33 43 52

Gen & admin expenses (20) (26) (30) (34) (39)

Selling expenses (0) (0) (0) (0) (0)

Other operating costs 1 (1) (1) (0) (1)

Operating profit 9 5 2 9 12

Operating EBITDA 11 8 3 11 14

Depreciation of fixed assets (1) (2) (2) (2) (2)

Amortisation of intangible assets (0) (0) - - -

Operating EBIT 9 5 2 9 12

Interest expense 0 0 - - -

Pre-tax profit 9 6 2 9 12

Taxation (1) (0) (0) (1) (1)

Profit after tax & minorities 8 5 2 8 11

Reported net profit 8 5 2 8 11

Recurring net profit 8 5 2 8 11


Cash flow (USDm) Dec-13 Dec-14 Dec-15F Dec-16F Dec-17F

Operating profit 9 5 2 9 12

Depreciation & amortisation 1 2 2 2 2

Change in working capital (3) 1 (6) 11 (4)

Other operating cash flow (1) 1

Operating cash flow 7 9 (2) 22 10

Interest paid 0 0 - - -

Tax paid 1 (2) (0) (1) (1)

Cash flow from operations 8 8 (2) 22 9

Capex (2) (2) (5) (2) (2)

Other investing cash flow (11) (9) - - -

Cash flow from investing activities (13) (11) (5) (2) (2)

Increase in debt (0) (0) - - -

Other financing cash flow (1) 11 - (3) (3)

Cash flow from financing activities (1) 11 - (3) (3)

Cash at beginning of period 21 15 21 14 31

Total cash generated (7) 8 (7) 17 3

Forex effects 1 (1) - - -

Implied cash at end of period 15 21 14 31 34



24 August 2015


Financial Exhibits

Balance Sheet (USDm) Dec-13 Dec-14 Dec-15F Dec-16F Dec-17F

Total cash and equivalents 15 21 14 31 34

Inventories 26 27 33 21 25

Accounts receivable 19 15 18 21 25

Other current assets 2 3 3 3 3

Total current assets 62 66 68 76 87

Tangible fixed assets 11 11 14 14 14

Intangible assets 6 9 9 9 9

Total other assets 0 1 0 0 0

Total non-current assets 17 20 23 23 23

Total assets 79 87 91 99 110

Short-term debt 0 - - - -

Accounts payable 16 14 18 20 24

Other current liabilities 12 11 11 11 11

Total current liabilities 29 26 29 31 35

Other liabilities 6 1 1 1 1

Total non-current liabilities 6 1 1 1 1

Total liabilities 35 27 30 32 36

Share capital 45 57 57 57 57

Other reserves (0) 3 5 11 18

Shareholders' equity 45 60 62 68 75

Other equity - - (1) (1) (1)

Total equity 45 60 61 67 74

Total liabilities & equity 79 87 91 99 110


Key Ratios (USD) Dec-13 Dec-14 Dec-15F Dec-16F Dec-17F

Revenue growth (%) 55.0 15.9 18.4 17.3 17.6

Operating profit growth (%) na (40.9) (66.2) 388.3 29.8

Net profit growth (%) na (36.5) (66.5) 388.3 29.8

EPS growth (%) na (45.3) (64.6) 388.3 29.8

BVPS growth (%) 23.5 15.6 8.7 9.4 11.2

Operating margin (%) 8.0 4.1 1.2 4.8 5.3

Net profit margin (%) 6.9 3.8 1.1 4.5 4.9

Return on average assets (%) 10.5 6.1 1.9 8.8 10.3

Return on average equity (%) 19.9 9.7 2.8 12.9 15.2

Net debt to equity (%) (32.4) (35.3) (22.6) (46.2) (46.2)

DPS 0.00 0.00 0.00 0.01 0.01

Recurrent cash flow per share 0.03 0.03 (0.01) 0.08 0.03



24 August 2015


SWOT Analysis

Competes in a specialized industry.

Healthy balance sheet with low gearing and strong cash generation ability.

High Barriers to entry

Competition in China for contract manufacturing

Listing on London AIM Market provides funds for inorganic growth.

Demand for high definition content in emerging markets driving satellite equipment sales.

Key customer accounted for 46% of revenue in FY14.

Execution risk

-2,000%

-1,417%

-833%

-250%

333%

917%

1,500%

0

5

10

15

20

25

30

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

P/E (x) vs EPS growth

P/E (x) (lhs) EPS growth (rhs)

-70%

-53%

-37%

-20%

-3%

13%

30%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

P/BV (x) vs ROAE

P/B (x) (lhs) Return on average equity (rhs)

Source: Company data, RHB Source: Company data, RHB

Company Profile Global Invacom Group Limited, an investment holding company, engages in the research and development, design, and supply of integrated satellite communications equipment in America, Europe, Asia, and internationally. The company was founded in 1985 and is headquartered in Singapore.


24 August 2015


Recommendation Chart

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Aug-10 Dec-11 Mar-13 Jun-14

Price Close

Source: RHB, Bloomberg

Date RecommendationTarget Price Price

2015-08-22

Source : RHB, Bloomberg

26

RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

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Pursuant to the Capital Market Law (Law Number 8 Year 1995) and the supporting regulations thereof, what constitutes as affiliated parties are as follows:

1. Familial relationship due to marriage or blood up to the second degree, both horizontally or vertically;

2. Affiliation between parties to the employees, Directors or Commissioners of the parties concerned;

3. Affiliation between 2 companies whereby one or more member of the Board of Directors or the Commissioners are the same;

4. Affiliation between the Company and the parties, both directly or indirectly, controlling or being controlled by the Company;

5. Affiliation between 2 companies which are controlled, directly or indirectly, by the same party; or

6. Affiliation between the Company and the main Shareholders.

PT RHB OSK Securities Indonesia is not an insider as defined in the Capital Market Law and the information contained in this report is not considered as

insider information prohibited by law.

Insider means:

a. a commissioner, director or employee of an Issuer or Public Company;

b. a substantial shareholder of an Issuer or Public Company;

c. an individual, who because of his position or profession, or because of a business relationship with an Issuer or Public Company, has access to

inside information; and

d. an individual who within the last six months was a Person defined in letters a, b or c, above.

Singapore

RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or associated companies do not make a market in any securities covered in this

report, except for:

(a) -

The staff of RHB Research Institute Singapore Pte Ltd and its subsidiaries and/or its associated companies do not serve on any board or trustee positions

of any issuer whose securities are covered in this report, except for:

(a) -

RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or its associated companies do not have and have not within the last 12 months had

any corporate finance advisory relationship with the issuer of the securities covered in this report or any other relationship (including a shareholding of 1%

or more in the securities covered in this report) that may create a potential conflict of interest, except for:

(a) -

Hong Kong

RHBSHK or any of its group companies may have financial interests in in relation to an issuer or a new listing applicant (as the case may be) the securities

in respect of which are reviewed in the report, and such interests aggregate to an amount equal to or more than (a) 1% of the subject company‟s market

capitalization (in the case of an issuer as defined under paragraph 16 of the Code of Conduct for Persons Licensed by or Registered with the Securities

and Futures Commission (the “Code of Conduct”); and/or (b) an amount equal to or more than 1% of the subject company‟s issued share capital, or issued

units, as applicable (in the case of a new listing applicant as defined in the Code of Conduct). Further, the analysts named in this report or their associates

may have financial interests in relation to an issuer or a new listing applicant (as the case may be) in the securities which are reviewed in the report.

RHBSHK or any of its group companies may make a market in the securities covered by this report.

RHBSHK or any of its group companies may have analysts or their associates, individual(s) employed by or associated with RHBSHK or any of its group

companies serving as an officer of the company or any of the companies covered by this report.

RHBSHK or any of its group companies may have received compensation or a mandate for investment banking services to the company or any of the

companies covered by this report within the past 12 months.

Note: The reference to “group companies” above refers to a group company of RHBSHK that carries on a business in Hong Kong in (a) investment

banking; (b) proprietary trading or market making; or (c) agency broking, in relation to securities listed or traded on The Stock Exchange of Hong Kong

Limited.

30

Kuala Lumpur Hong Kong Singapore

RHB Research Institute Sdn Bhd Level 11, Tower One, RHB Centre

Jalan Tun Razak Kuala Lumpur

Malaysia Tel : +(60) 3 9280 2185 Fax : +(60) 3 9284 8693

RHB OSK Securities Hong Kong Ltd.

12th Floor

World-Wide House 19 Des Voeux Road Central, Hong Kong

Tel : +(846) 2465 1118 Fax : +(846) 2810 0908

RHB Research Institute Singapore

Pte Ltd (formerly known as DMG & Partners Research Pte Ltd)

10 Collyer Quay #09-08 Ocean Financial Centre

Singapore 049315 Tel : +(65) 6533 1818 Fax : +(65) 6532 6211

JaK-arta Shanghai Phnom Penh

PT RHB OSK Securities Indonesia

Wisma Mulia, 20th Floor Jl. Jend. Gatot Subroto No. 42

JaK-arta 12710, Indonesia Tel : +(6221) 2783 0888 Fax : +(6221) 2783 0777

RHB OSK (China) Investment Advisory Co. Ltd.

Suite 4005, CITIC Square 1168 Nanjing West Road

Shanghai 20041 China

Tel : +(8621) 6288 9611 Fax : +(8621) 6288 9633

RHB OSK Indochina Securities Limited

No. 1-3, Street 271 SangK-at Toeuk Thla, Khan Sen Sok

Phnom Penh Cambodia

Tel: +(855) 23 969 161 Fax: +(855) 23 969 171

Bangkok

RHB OSK Securities (Thailand) PCL

10th Floor, Sathorn Square Office Tower 98, North Sathorn Road, Silom

Bangrak, Bangkok 10500 Thailand

Tel: +(66) 2 862 9999 Fax : +(66) 2 862 9799

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