Inari enhances its earnings base with recent acquisition

Inari enhances its earnings base with recent acquisition
Business & Markets 2013
Written by Kenanga Research
Wednesday, 18 December 2013 10:18

Inari Amertron Bhd
(Dec 17, RM1.59)
Rated trading buy at RM1.59 with a fair value of RM2.10: Inari Amertron, an electronics manufacturing services (EMS) player with high exposure to the smartphone and tablet (S&T) segment within the semiconductor industry, has remained profitable for the last five financial years achieving a five-year compound annual growth rate (CAGR) of 40%.

With its recent acquisition of Amertron Global Inc, the group has extended its portfolio from mainly focusing in the S&T segment to the aerospace, defence and automotive industries. This enables the group to ride on the strong wave of the S&T upcycle as well as capitalise on the defensive qualities of the matured high-volume semiconductor industries.

Thanks to the consolidation of earnings from the newly acquired Amertron (with revenue growth of 250% year-on-year [y-o-y] in 1QFY14), net profit (NP) of the enlarged group in the first quarter ended Sept 30 of financial year 2014 (1QFY14) soared by 179% y-o-y despite the lower blended NP margin of 11.0% (diluted from 13.8% in 1QFY13, due to Amertron’s different product portfolio).

If we were to strip out Amertron’s top line figures, Inari’s revenue still grew organically by 30% y-o-y underpinned by its continual capacity expansion. While we are aware of the lower blended NP margin post consolidation, we understand the margin could improve further with higher operational efficiency, going forward, amidst the integration of operations.

Inari’s bread and butter business, that is the assembly of radio frequency (RF) chips for Avago Technologies (comprising about 75% of total revenue), has made it a direct proxy to the fast growing S&T segment. With Long Term Evolution (LTE) being the next phase of the evolution from the current HSPA+ technology, Inari’s expertise in RF products has positioned itself well for the next growth phase.

All in, management expects its Plant 5 in Penang to increase capacity by another 15% which we believe could translate into an additional RM6 million to the bottom line assuming an utilisation rate of about 85%. Coupled with Ceedtec Sdn Bhd’s (a 51%-owned subsidiary which provides engineering solutions focusing on research and development and product development) operations breaking even as well as the earnings consolidation from Amertron — which has seen rising demand for its fibre optic products — we expect its FY14 and FY15 earnings to increase by 85% and 29% respectively.

Post Amertron acquisition, we understand that the group’s net gearing still remains low at 0.16 times.

With its sustainable earnings profile, we believe the group can offer up to a FY14E dividend per share of 7 sen translating into a decent dividend yield of about 4.4%, assuming 40% dividend payout ratio.

We value the stock at RM2.10 at 12 times FY14 price-earnings ratio (PER), which is at a +2 standard deviation level above its two-year average forward PER. We view that it deserves a premium valuation due to its earnings stability, robust FY12 to FY14E NP CAGR of 98%, high exposure to the booming S&T segment, and rising investability as it is en route to a Main Market listing. — Kenanga Research, Dec 17


This article first appeared in The Edge Financial Daily, on December 18, 2013.