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Inari Amertron Bhd
(Sept 17, RM3.40)

Initiate a buy call with a fair value of RM3.83: Our call is based on price-earnings ratio of 15 times financial year 2016 forecast (FY16F) earnings, due to surging growth and demand for its radio frequency (RF) chips. It is currently trading at 13 times — 1SD (standard deviation) above its five-year average.

Inari offers a direct play into the Tier 1 smartphone market, benefiting from the success of its key client, Avago. Avago is the preferred supplier of RF products for top global smartphones due to its superior technology. Inari is one of Avago’s key back-end contract manufacturers for its RF chips.

We forecast core earnings to accelerate from RM153 million in FY15 to RM189 million in FY16, before rising further to RM218 million in FY17 and to RM241 million in FY18, with a three-year compound annual growth rate of 16%. In addition, net profit margins are expected to improve to 18% in FY18 from FY15’s 16%.

Inari’s robust growth is underpinned by a capacity expansion in the RF back-end processing facilities in Penang. Our estimates suggest that RF contributes to more than 70% of Inari’s earnings. Inari’s five RF processing plants in Penang are currently operating at full capacity. It will increase capacity by 30% in phases in FY16 through its new P13 plant, with an additional 200 million RF chips processed per annum.

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Hence, we have imputed a 25% increase in RF revenue contribution in FY16, followed by 10% to 15% increases in RF capacity and utilisation year-on-year for our FY17 to FY18 estimates. This is on the back of pent-up demand from Avago as it resolves its wafer-processing constraints.

We expect Inari’s attractive net profit margins to grow further by 1% to 2% due to a higher margin product mix and operational efficiencies in Amertron, which is Inari’s optoelectronics and fibre optics subsidiary that was purchased in 2013. The group aims to improve its net margins from six percentage points (ppts) to 10ppts via better cost control and efficiencies from procurement as part of the group’s strategy.

The appreciation of the US dollar favours Inari as 99% of its sales are denominated in USD. We currently impute an average exchange rate of US$1/RM4.00. After conducting our sensitivity analysis, we estimate that for every 1% appreciation of the US dollar against the ringgit, Inari’s net profit will also benefit by 1%.

Looking forward, Inari will diversify its earnings to grow its fibre optics cable and receiver business on the wave of cloud computing and data centres on a global scale. Its fibre optics division will contribute an additional US$20 million of revenue in FY16F with its new products. — AmResearch, Sept 17

 

This article first appeared in digitaledge Daily, on September 18, 2015.

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