Inari’s rights issue proceeds likely to be used for business expansion

by **Cals** Wed 09 Jul 2014, 08:49

Business & Markets 2014

Written by RHB Research

Tuesday, 08 July 2014 10:04

Inari Amertron Bhd
(July 7, RM3.11)
Maintain buy with target price of RM3.49: Inari has proposed a 1-for-8 rights issue at an indicative price of RM1.50. The rights shares will come with free warrants at a 1:1 ratio at a RM2.00 exercise price. We advise investors to subscribe to the rights shares as we believe the proceeds raised (estimated at more than RM100 million) will likely be used to expand its core businesses to propel earnings growth in the long run.

The rights price of RM1.50 represents a discount of 49.1% to its theoretical ex-rights price of RM2.95, based on its last closing. At its existing share base of 534.8 million shares, we estimate that the rights issuance could raise RM100.3 million.

Management highlighted that some RM60 million of the proceeds raised will be used to expand its existing businesses, involving the setting up of new plants and procurement of new equipment. This, in our view, most likely caters to future growth opportunities within its radio frequency integrated circuits segment — we highlighted previously that existing capacity is almost fully occupied at an average utilisation rate of over 85%.

The indicative exercise price of the warrants at RM2.00 implies a discount of 32.2% to Inari’s theoretical ex-rights price of RM2.95. This, in our view, will entice investors to subscribe to the rights as the warrants will be issued deep in the money.

On a side note, its major shareholder Insas Bhd has agreed to subscribe to its entitlements to the rights shares in full via Insas Technology Bhd and Insas Plaza Sdn Bhd.

We believe the cash call will help Inari to expand its core businesses to propel earnings growth going forward. Maintain “buy”, with our fully-diluted target price (TP) unchanged at RM3.49 (16 times calendar year 2015 price-earnings ratio).

Upon completion of the proposed rights issue, our ex-rights TP will be adjusted to RM3.16. While this may appear to offer limited upside for now, we will revisit our model upon management’s confirmation of the potential earnings accretion from its new expansion opportunities ahead. — RHB Research, July 7

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This article first appeared in The Edge Financial Daily, on July 8, 2014.[/size]