Warrants Update: LTE demand to drive Inari’s growth

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INARI Amerton Bhd, a proxy to the smart device boom, has been showing strong earnings growth momentum this year, and is one of the technology companies that have attracted a strong following of institutional investors.

After posting record profits of RM33.76 million in the first quarter ended Sept 30 — up 60% from a year ago — the group received “buy” calls with target prices ranging from RM3.41 to RM4.20.

Meanwhile, its share price remained relatively stable at RM2.53 as at last Thursday, valuing it at an undemanding 12 times earnings. A cheaper entry into the stock would be through its warrants, Inari Amerton Bhd-WA, which closed at RM2.15 apiece. With a strike price of 38 sen, the warrants are effectively being valued at zero premium.

It is worth noting that the warrants have plenty of life left, expiring only in June 2018. Factoring in the time value of the warrants, the marginal discount is not too bad.

However, the low exercise price relative to the price of the warrants means that the warrants have very little implied leverage. On top of that, Inari has been paying dividends, with a 1.8 sen interim and 0.4 sen special dividends declared at its last earnings. Dividend payouts erode the value of warrants which cannot collect the dividends.

Inari’s main driver of growth has been its radio frequency (RF) chips that leverage on the growth of long-term evolution (LTE) demand. This means that the group’s earnings potential is closely linked to the smart device industry, which includes tablets and smartphones.

With a market capitalisation of RM1.69 billion, Inari is big enough to show up on institutional radar screens. Over a dozen funds — mostly foreign — have taken notice of the group, including the Blackrock Group and New York Life Investment from the US, which have emerged as shareholders.

“Inari’s positive earnings momentum continues to be underpinned by strong demand growth for its RF chips, led by a spurt in LTE growth, particularly in China, as well as increased density of RF chips per device. The strong set of results reaffirms our positive stance on the stock and Inari as a leading RF outfit in the region,” notes a research report by Affin Hwang Capital.

The research house has maintained its “buy” call on the stock with a target price of RM3.80. “We leave our forecast unchanged for now, although we believe there is room for upgrades, should this strong momentum pace sustain.”

Key risks, it notes, include a slowdown in global demand for smart devices, rapid average selling price erosion, loss of customer base and introduction of new technologies that will render Inari’s products obsolete.

Datuk Thong Kok Khee, via his control of Insas Bhd which has a 28.91% stake in Inari, has an indirect 31.08% interest in the group.

This article first appeared in The Edge Malaysia Weekly, on December 8-14, 2014.