This article first appeared in The Edge Financial Daily on April 13, 2018
Inari Amertron Bhd
(April 12, RM1.99)
Maintain hold with a target price (TP) of RM2.27: Inari Amertron Bhd’s share price went ex-bonus on Wednesday following the issuance of 1,009 million bonus shares, increasing the group’s share base to 3,028 million shares. We are positive on the bonus issue. Although it does not alter the company’s fundamentals, we expect this corporate exercise to boost the stock’s liquidity and improve near-term trading sentiment.
Although we see robust growth for Inari’s radio frequency (RF) segment, driven by rising RF content value in mobile devices, we are cautious about its near-term outlook following its key customer Broadcom’s guidance for a larger seasonal decline in wireless revenue due to lower shipment to its North American smartphone customer in February to April 2018. But Broadcom expects to partially offset the decline by higher shipment to its Korean customer to support the new-generation flagship smartphone.
We are encouraged to learn that the second-phase expansion is underway and on track for completion in May 2018. Following completion, the P13B plant will be the largest plant under the group with a total manufacturing floor area of 340 square feet. In addition, Inari started constructing its first factory in Batu Kawan in early April 2018. The group expects the first plant in Batu Kawan to be ready in September 2018.
We think Inari is on track for another streak of multi-year earnings growth, driven by the expansion of its P13B and Batu Kawan plants, stronger earnings contribution from new products, and resilient earnings from RF. However, we see weakness in the group’s earnings in the second half of financial year 2018 forecast (FY18F) due to reversal in the ringgit to US dollar movement. The average ringgit to a US dollar has strengthened by 12% year-on-year (y-o-y) and 6% quarter-on-quarter against RM3.92 in the first quarter of 2018. We estimate every 1% appreciation in the ringgit will reduce the group’s earnings per share (EPS) by 2.5%.
We expect Inari to deliver 20% y-o-y EPS growth in FY18F, driven by higher RF shipment volume and new product portfolio. We assumed an average foreign exchange rate of RM4 to US$1 for FY18F to FY20F. Following the completion of the bonus issue, our target price stays at RM2.27, still based on 20 times 2019 forecast price-earnings ratio (PE) (30% premium to the local sector target PE of 15.4 times). We think Inari deserves to trade at a premium to its peers, given its superior average 2017 to 2019 forecast net margin of 19.6% (our estimates) versus sector mean of 14%.
Key downside risks to our “hold” call are the strengthening of the ringgit against the US dollar, slowdown in RF demand and escalation in global trade tariff. Meanwhile, depreciation in the ringgit against the US dollar, better-than-expected RF demand and higher earnings from new divisions are key upside risks to our call. — CGSCIMB Research, April 11