INARI (0166) - Inari Amertron - Scaling New Heights
Inari’s share price continued its positive momentum – hitting an all-time high of MYR3.33 on 5 Mar after going ex-rights on 20 Jan – and we attribute this to its improved earnings visibility, leveraging on the MYR’s weakness against the USD. Maintain BUY, with our TP lifted to MYR3.74 (from MYR3.41, 18x FY16F P/E, 14% upside) as we roll forward our valuation to FY16.The MYR factor. The recent weakness of the MYR against the greenback should help to improve Inari Amertron’s (Inari) earnings growth when its 3QFY15 (Jun) results are released in April. The USD/MYR rate has averaged at MYR3.60 YTD vis-à-vis 4Q14’s MYR3.37 (+6.8% QoQ) and 1Q14’s MYR3.30 (+9.1% YoY). We do not rule out the possibility of short-term volatility on a further upside, judging by the current condition of the global macroeconomic environment. Based on our estimates, the company could potentially enjoy an earnings upgrade of 3-5% for each 1% decline in the MYR/USD exchange rate, assuming everything else remains constant.
Updates on operations. Management is looking to install 150 more testers for its radio frequency (RF) division at its new plant, known as P13, over the next 12-18 months. This will increase its capacity by almost 30% from 522 tester units currently. We expect commercial production to commence from mid-2015, upon obtaining the necessary qualifications from its customers. Management reiterated its target net profit margin of 10% (from 7% currently) under the Amertron division within the next 12-18 months.
Forecasts and risks. We upgrade our FY15F-16F EPS by 4.6-4.9%, taking into account our revised USD/MYR assumption of an average MYR3.60 for 2015 (from MYR3.50) and after tweaking our opex structure for housekeeping purposes. Key risks to our earnings estimates include: i) strengthening of the MYR against the USD, ii) higher raw material costs, and iii) a potential slowdown in the semiconductor market should consumer spending tighten.
Maintain BUY. All in, we maintain our BUY call, with our fully-diluted TP now at MYR3.74 as we: i) update our SOP valuation following the completion of its rights exercise, and ii) roll forward our valuation to FY16. We expect its FY15-16 earnings momentum to be driven by a favourable forex environment, while full earnings accretion from P13 will likely kick in come FY17.
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Company Profile
Inari Amertron (Inari) is involved in the electronics manufacturing services industry as a provider of semiconductor packaging and testing devices for components used in radio frequency (RF) wireless devices. The group also designs, develops and manufactures equipment and components for testing and measurement as well as fibre optic transceivers.
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Source: RHB
