ALREADY among the more bullish of analysts tracking Inari Amertron Bhd, Maybank Investment Bank Research on Aug 26 upgraded its fair value for the semiconductor player with a thriving wireless (radio frequency) division by 21% to RM3.80. That’s after raising net profit forecast for FY2016 to FY2018 on stable margins from a better sales mix and plant utilisation.

“On the back of a strong two-year earnings CAGR (compound annual growth rate) of 20%, which still has upside, our premium valuation peg for Inari is justified,” Maybank-IB writes, adding that Inari’s valuation of 14.2 times CY2017 earnings was “undemanding for a growth stock with good earnings visibility”.

Closing at RM3.31 last Thursday, the counter had gained 5.4% over four market days but there is still a 14.8% upside potential if Maybank-IB is right in having the highest fair value among 10 analysts covering Inari.

There are five “buy” and five “hold” recommendations. RHB Research Institute’s RM2.85 target price is the lowest, and six analysts think Inari should be worth at least RM3.30 apiece, Bloomberg data show. Its company-issued warrants, Inari-WA and Inari-WB, offer an alternative avenue to trade the stock. Closing at RM1.68 last Thursday, Inari-WB was trading at a 0.91% discount to the underlying shares. The warrant, which has a strike price of RM1.60 and a one-for-one conversion ratio, will expire on Feb 17, 2020. If Inari reaches RM3.80, Inari-WB should theoretically be worth 31% more at RM2.20, assuming zero premium to the underlying stock.

Inari-WA — which has a 33 sen strike price, one-for-one conversion ratio and expires on April 6, 2018 — fetched a 0.6% premium to the mother shares at its close of RM3 last Thursday. At parity to the underlying securities, Inari-WA should be worth 15.7% more at RM3.47 if the mother shares reach Maybank-IB’s RM3.80 target price.

There are also several bank-issued structured call warrants. These include Inari-CS, which has a strike price of RM3.20, four-to-one conversion ratio and will expire on May 9 next year. Closing at 16.5 sen last Thursday, the derivative was trading at a 16.6% premium to the underlying stock but offers at least double the gearing ratio of the company-issued warrants. Structured warrants are cash-settled and cannot be converted into ordinary shares.

Maybank-IB says forex fluctuations could dictate Inari’s margins — every time the ringgit weakens by 1% against the US dollar from RM3.90, the company’s FY2017 and FY2018 earnings will rise by 1%. Risks include weaker earnings visibility should there be a drastic fall in global Tier-1 smartphone shipments. Some 80% of Inari’s group revenue is contributed by Broadcom. Its dependence on Broadcom is a major risk if it should lose its contract. Failure to renew its pioneer tax benefit status by end-2017 is another risk. 

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