Inari on track for production capacity expansion

by **Cals** Thu 10 Jul 2014, 02:28

Business & Markets 2014

Written by Affin Investment Bank

Wednesday, 09 July 2014 10:05

Inari Amertron Bhd
(July 8, RM3.24)
Maintain buy with target price of RM4.26: Year-to-date, Inari’s share price has outperformed the KLCI by 92.0% and we believe this is largely underpinned by its solid earnings delivery in the third quarter ended March 31 of financial year 2014 (3QFY14) as well as bright earnings prospects ahead.
We expect Inari to post its fourth consecutive year of record earnings in FY14E and forecast a 34% growth in core net profit for FY15E. Notably the stock has appreciated by 13.5% since its transfer to the Main Market of Bursa Malaysia a month ago.
Despite the strong appreciation in its share price, dividend yield forecasts for FY15 and FY16 remain decent at 4% to 5%.
(The Inari group started in June 2006 with the establishment of Inari Technology Sdn Bhd. In June 2013, the group acquired Amertron Global Inc and changed its name to Inari Amertron Bhd.)
Management guided that there has been a strong pick-up in demand for its radio frequency (RF) product. We believe this is largely due to the higher demand from its key customer, Avago, underpinned by strong demand from end customers. The total output for the RF component in 2014E is estimated at 1.6 billion units, from 1.4 billion units in 2013 (up 15% year-on-year).
Similarly, in its Amertron operations, the demand for its opto-coupler related products has been rising. We believe this is largely due to the consolidation of its peers. While Amertron’s net margin improved to about 7% to 8% (from about 4% in FY13), management believe there is still room to enhance the net margin to about 10%.
Separately, management guided that its fibre optics division, Inari South Keytech (ISK), will start to contribute positively in FY15. We have factored a revenue contribution of RM40 million into our FY15 earnings forecast. Given the excellent prospects in the fibre optics space, we believe this would be the next growth area for Inari.
Management has plans to acquire a new plant in Penang to house the additional production volume in the RF segment as the current utilisation rate at its existing plant is estimated at more than 85%. As for its ISK operations, management indicated that it is facing some employee and talent retention issues partly due to the close proximity to Singapore.
Therefore, it is part of management’s plan to move its ISK operations to the new plant for mass productivity in the future. We believe this would help to reduce costs in terms of logistics and labour as well as improve efficiencies due to the well-established eco-system in Penang.
Management also said it plans to expand its existing Clark facility to accommodate the higher demand for its opto-coupler products, driven by consolidation of some of its regional peers.
The recent proposed rights issue has reaffirmed our view on management’s commitment to its expansion plan. While the proposed rights issue will dilute Inari’s immediate earnings per share (EPS), we are positive on the long-term benefits as the expansion will likely be earnings-accretive in the future.
In view of the favourable industry prospects and Inari’s ability to leverage on Avago’s strength in the RF segment, as well as its strong earnings delivery and growth potential, we think Inari will continue to trade at the higher end of its three-year price-earnings ratio (PER) band of 4 times to 10 times. As such, we recently upgraded our target PER for Inari to 18 times (from 15 times). Our target PER of 18 times is comparable to that of Globetronics in view of the similar segment exposure. — Affin Investment Bank, July 8

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This article first appeared in The Edge Financial Daily, on July 9, 2014.[/size]