This article first appeared in Capital, The Edge Malaysia Weekly on October 25, 2021 - October 31, 2021

Target price: RM4.50 ADD

CGS-CIMB RESEARCH (OCT 19): Inari Amertron Bhd has signed a memorandum of understanding (MoU) with China Fortune-Tech Capital Co Ltd (CFTC) to set up a joint venture (JV) to carry out outsourced semiconductor assembly and test (OSAT) manufacturing service for the China market. Under the MoU, Inari will be responsible for providing expertise and operational leadership to expand Amertron Technology Kunshan (ATK) and also at new plant sites in China. It will also provide technical assistance and knowledge related to OSAT manufacturing operations.

Meanwhile, CFTC will provide expertise, relationship and guidance on business opportunities, including sales, marketing strategy, business development and risks within China’s regulatory framework. It will also provide local leadership for the physical setting up of plants, health and safety, environmental compliance and secure the human resources needed to achieve the best performance outcome for the JV.

Inari will contribute 100% of the shares in ATK and a new cash investment of RMB463 million (RM300 million) as its capital contribution to the JV, while CFTC will contribute a new cash investment of RMB749 million and 100% of the shares in Yiwu Semiconductor International Corp valued at RMB21 million. Upon completion, Inari will own 55% equity interest in the JV company and CFTC will hold the remaining 45%.

Inari will finance the JV with internally generated funds as it had a healthy net cash position of RM904 million at end-June. The company also raised RM1 billion from a private placement at end-July. The proposed JV is subject to the execution of definitive agreements on the terms and conditions to be negotiated and agreed upon by both parties. The deal is expected to be inked within six months.

Inari’s management plans to leverage the existing footprint at ATK to support the JV. Plans to raise its production floor area at ATK from 50,000 to 100,000 sq ft by 2022 could double the contribution from ATK in FY23F. We reiterate our “add” call with a higher target price of RM4.50 as we rollover our valuation to end-2022. We peg our valuation to 34 times CY23F PER, +1 standard deviation above its three-year historical mean.

Target price: RM6.20 BUY

UOB KAY HIAN (OCT 15): Pentamaster Corp Bhd achieved its highest earnings at RM88 million in 2019 following its business restructuring from standard equipment to customised solutions, reaping the benefits from 2015 with an earnings base of RM12 million. To spearhead momentum after a speed bump in 2020 and 2021, the group is striving via geographical, segmental and product-solution diversification.

For the automotive segment, excluding China (Jiangsu), the group has established a subsidiary in Japan, with Germany to come next. In its medical segment, the group is leveraging TP Concept’s technical know-how for single-use medical devices via MediQ, with earnings contribution expected in 2023. In terms of product offerings, the group will continue to offer more automation solutions, ranging from components level to new-generation semiconductor materials.

The group expects higher sales momentum to compensate in terms of absolute earnings. While its systemic issues could continue into the near term, strong sales based on the visibility from its order book backlog could sufficiently offset the downside. Its latest order-book backlog, higher than RM270 million (on a rolling basis), has a momentum that is expected to pick up from here.

Target price: RM8.30 BUY

UOB KAY HIAN (OCT 18): Hot on the heels of its aggressive energy transition and electric vehicle (EV) expansion cycle, Greatech Technology Bhd secured another RM163 million for its order book on top of its outstanding RM206 million order-book backlog (as at early August).

Note that the latest outstanding order-book backlog of RM369 million mainly consists of: (a) production line system (PLS) orders from First Solar Inc, following its massive expansion plan in Ohio and India, and (b) existing EV customers. Management is targeting an order-book backlog of RM380 million for the rest of 2021 and eyeing another RM500 million in potential jobs in 2022.

Greatech has inked a master equipment purchase agreement with First Solar, with a contract until end-2025, while its EV and medical segments are expected to anchor growth in 2022. The company’s previously signed non-disclosure agreements with a few new EV customers could warrant more orders (likely PLS) on top of the existing orders.

Greatech is still aiming for a total of four to six customers across the EV and energy storage markets, on top of its existing four EV customers. For the highly lucrative medical segment, the company expects earnings contribution from 2022 onwards.

Target price: RM1.22 OUTPERFORM

KENANGA RESEARCH (OCT 20): Total gross advertising expenditure (adex) for 3QCY21 compiled by Nielsen shows a 3.3% q-o-q drop and 18% improvement year to date (YTD). Free to air (FTA) television adex rose by 50% YTD, which was further boosted by the addition of new channels to the FTA TV coverage, namely TVS Digital Terrestrial Television (DTT) and TV6 DTT in 3QCY21. Moreover, FTA TV continues to gain a higher market share in the adex industry as it is up by two percentage points q-o-q and 13% YTD.

We note that without the contribution of digital adex to the media industry, total adex would have plunged 7% q-o-q. We believe that post-lockdown and reopening of economic sectors will prompt advertisers to advertise heavily across all media platforms, thus improving adex in 4QCY21. Non-performing segments will pick up too.

We maintain “overweight” on the sector, with Astro Malaysia Holdings Bhd as our top pick for its attractive dividend yield of 7.9% and competitive advantage over other internet service providers as the group can bundle Astro-branded internet speeds with its content.

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