Inari Amertron Bhd
(May 15, RM3.39)
Reiterate “buy” with unchanged target price (TP) of RM3.44: Inari Amertron Bhd (Inari)’s cumulative nine months for financial year 2015 (9MFY15) sales of RM678.1 million was translated into a core net profit of RM90.1 million, accounting for 66.4% and 63.7% of Hong Leong Investment Bank and consensus’ full-year estimates, respectively.

This is in line due to seasonal weakness. Also, contributions from added radio frequency (RF) capacity and Chipfab at its P13 plant in Bayan Lepas Industrial Park in Penang will further boost earnings in the subsequent quarter.

Declared third single-tier dividend of 2.1 sen for the third quarter of financial year 2014 (3QFY14: 2 sen inclusive of special dividend of 0.8 sen) per share, represent circa 39.4% payout as per policy. Ex-date on June 3, 2015. Year-to-date dividend amounts to 6.6 sen per share.

The 3QFY15 turnover of RM228.3 million (+19.0% year-on-year [y-o-y] and +0.2% quarter-on-quarter [q-o-q]) was another historical high mainly due to higher trading volume from RF businesses as demand from smartphones and mobile devices swelled.

This was also partly boosted by the strengthening of the US dollar (USD) which averaged circa RM3.62 per USD (+9.6% y-o-y and +7.5% q-o-q).

While the sales breakdown was not disclosed, we understand that Amertron’s contribution was flat and stable q-o-q. Its transformation is on track to expand margins through synergy and efficiency.

It remains optimistic about business prospects and believes that the global semiconductor industry will undergo a modest compound annual growth rate (CAGR) of 3.1% from 2014 to 2019.

Optoelectronics is forecasted to rise 10% in 2015 to a record high of US$34.8 billion (RM123.88 billion) and continue to grow by CAGR of 6.9% until 2019.

Work on starting up production in P13 began in 3QFY15 and is expected to contribute modestly in 4QFY15.

The catalysts comprise wireless communications, mobility, the Internet of things (machine-to-machine), long-term evolution, business diversifications into optoelectronics and test and measurement, favourable foreign exchange, and continual effective operational strategy.

The risks include major client risk regarding Avago Technologies Ltd or high dependency, foreign exchange, patent disputes, and resource and labour shortage.

The ratings for positives include appreciation of the greenback, and 40% dividend payout providing reasonable yield and strong earnings growth while negative ratings involve an innovation stalemate in telecommunications.

We reiterate “buy” while TP is maintained at RM3.44, pending analyst briefing with upward bias. TP is pegged to multiple of 15 times of calendar year 2016 earnings per share. — Hong Leong Investment Bank, May 15

This article first appeared in The Edge Financial Daily, on May 18, 2015.