Inari Amertron Bhd
(June 12, RM2.26)
Maintain buy with a higher target price of RM2.80: We are positive about Inari Amertron Bhd’s aggressive floor space expansion to 1.35 million sq ft (120,000 sq m) [+34%] by end 2018. For this, we now impute job win assumption for P21 and P34 worth RM150 million and RM300 million for financial year 2019 (FY19) and FY20, ending June. We also raise radio frequency volumes in P13B-2 for the push for 5G cellular networks in 2019. These translate into a 10%/20% increase in our earnings forecasts.
From 1.01 million sq ft floor space currently, Inari plans to expand it to 1.35 million (+34%) by end 2018 with the completion of P13B-2 (120,000 sq ft) and P34-1 (220,000 sq ft). Into 2019, further expansion at P34 (P34-2 and P34-3, likely by mid-2019) and consolidation of P8 and Parañaque operations to P13B2 and CK2 respectively should lift floor space to 1.68 million sq ft. We now assume that Inari will secure additional job wins of RM150 million/RM300 million for FY19/FY20 underpinned by: i) new components outsourcing by Osram at P21 (for example mini light-emitting diode [LED], health sensor, replacement of infrared LED with vertical cavity surface-emitting laser — these should bring P21 floor space utilisation to 90% to 100% by end 2018); and ii) aggressive floor space expansion of P34.
We do not rule out further outsourcing from Osram especially since it has commissioned the first phase of its wafer fabrication in Kulim, which will see more back-end semiconductor jobs being dished out in the future.
On largely unchanged forecasts post third quarter of FY18, ending March, results briefing where Inari’s expansion plans were conveyed, we believe that consensus has yet to price in Inari’s aggressive floor space expansion. With the imminent commissioning of Inari’s new plants and component wins announced recently, we believe an earnings upgrade by consensus is forthcoming.
Among the technology hardware names in Malaysia, Inari, as the sector bellwether, is the first name to erase its share price loss in the first five months of 2018 (+4% year to date). At 18 times calendar year 2019 price-earnings ratio currently, valuations are still undemanding for a growth stock offering 30% three-year earnings compound annual growth rate. “Buy”. — Maybank IB Research, June 11