Warrants Update: Inari-WA a cheaper proxy to tap upside

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This article first appeared in Capital, The Edge Malaysia Weekly, on February 27 - March 5, 2017.

 

OVER the past few weeks, shares of Apple Inc and the largest manufacturer of its phones, Hon Hai Precision Industry Co Ltd, have surged on growing optimism about Apple’s 10th anniversary iPhone — the iPhone 8.

Since the beginning of the year, Apple’s shares have gained 18.5% while Hon Hai, the largest company in Taiwan’s Foxconn Technology Group, saw its share price rise 8.12%.

On the home front, Inari Amertron Bhd is one company that is benefiting from the anticipated ramp-up in production. Inari generates over 70% of its revenue from assembling and testing radio frequency (RF) chips for Broadcom Ltd, which in turn supplies chips to major smartphone makers like Apple.

Last Wednesday, Inari’s share price closed at a 52-week high of RM1.89. However, its warrants, Inari-WA, ended the day at RM1.70 apiece, a 10% discount to the mother share.

The warrants have a strike price of 13.2 sen and a one-for-one conversion ratio. As American call options, they can be converted at anytime.

It is worth noting that the price of Inari-WA fell from RM3.20 apiece after a bonus issue last month.

The warrants have about 1½ years of life left, expiring in June next year.

However, it is noteworthy that Inari pays out a relatively consistent dividend. The group paid out 8.4 sen per share in the financial year ended June 30, 2016. The payment of dividend will dilute the value of the warrants.

Inari’s warrants also have a relatively low gearing. This is because the price of the warrants is relatively high and the strike price is relatively low.

That said, Inari-WA still offers a slightly cheaper means to buy into Inari’s upside potential, which in turn is counting on a strong demand for iPhone 8.

Inari is currently valued at 19.3 times forward earnings.

Another potential boost for Inari is the group’s reported diversification into iris-scanning technology. Similar to its business in RF, Inari is looking to supply testing equipment for iris-scanning devices, which are expected to be introduced in the next generation of smartphones as a security feature.

Inari will reportedly supply testing equipment to Germany’s OSRAM Licht AG for the latter’s iris-scanning technology. OSRAM is planning to invest RM4.6 billion to build an LED chip plant in Kulim, Kedah.