Inari Amerton’s new ventures bring exciting growth prospects

by **Cals** Tue 10 Jun 2014, 03:12

Business & Markets 2014

Written by RHB Research

Monday, 09 June 2014 09:45

Inari Amerton Bhd
(June 6, RM2.79)
Initiating coverage with buy call and target price of RM3.49: We initiate coverage on Inari Amertron with a “buy” and fully-diluted target price of RM3.49, pegged to a 16 times forecast calendar year 2015 price-earnings ratio (assuming full conversion of its 140 million outstanding warrants). Based on its existing share base of 507.1 million, our target price would have stood at RM4.45.

Inari Amertron is involved in the electronics manufacturing systems industry. The group provides semiconductor components, packaging and testing services as well as manufacturing optoelectronic equipment. In addition, it recently diversified into the electronics test and measurement (ETM) segment as well as fibreoptics components manufacturing.

Currently, Inari Amertron operates from nine production plants located in Malaysia, the Philippines and China. It recently established partnership with Avago Technologies (Avago). Avago is Inari Amertron’s single largest customer, contributing about 70% of its current total sales. These mainly comprise key services like package assembly and testing. Of note, Avago’s radio frequency integrated circuits (RFICs) are among the most reliable in the world and Inari Amertron is poised to benefit from this by virtue of being one of Avago’s three main RFIC assembling and testing contractors.

Meanwhile, under its optoelectronics arm, the group manufactures products like light-emitting diodes (LEDs) and infra-red (IR) sensors for Avago.

To diversify its earnings base, Inari Amerton recently ventured into the ETM business via its 51%-owned Ceedtec Sdn Bhd. Notably, the latter is being incubated to become an original design manufacturer (ODM) for Agilent Technologies. The group has also moved into research, design and manufacturing of fibreoptics-related products through its 100%-owned Inari South Keytech Sdn Bhd. The latter commenced production of a new fibreoptics component for Avago in January. We estimate that these two new divisions should contribute 15% to 20% of Inari Amerton’s total revenue by financial year 2016.

On an international basis, we believe that the group is comparable to a number of semiconductor manufacturing heavyweights like Analog Devices, Foxconn International and Advanced Semiconductor Engineering. We see its business of manufacturing integrated chips for the telecommunications industry to be similar.

Although Inari Amertron currently has a relatively smaller earnings base, we value the group on par with its international peers. This is because we believe that its growth prospects are more exciting going forward as its new business ventures mature and bear fruit at the right time.

Although Inari Amertron lacks a direct competitor in the local market, we believe that the group’s closest listed peers are Globetronics Technology Bhd, Malaysian Pacific Industries Bhd and Unisem (M) Bhd, as all are involved in the technology manufacturing segment and operate in the same business environment. Our valuation implies a 21% premium to its listed local peers. We believe this is justified, given Inari Amertron’s heavier emphasis on the smartphone and tablet segment via its relationship with Avago as well as the relatively more exciting growth prospects due to new business opportunities.

Given a 28% potential upside, we initiate coverage on Inari Amertron with a “buy” recommendation. — RHB Research, June 6

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This article first appeared in The Edge Financial Daily, on June 9, 2014.
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