Highlights

Proposed renounceable right issue of up to 88.8m new shares together with up to 88.8m free detachable warrants

Every 8 ordinary Inari shares are entitled with 1 right share at an indicative price of RM1.50 sweetened with 1 warrant for every 1 rights share subscribed.

The 5-year American-style warrant’s indicative exercise price is RM2.00 on the basis of 1 for 1 new Inari share.

Majority of the Right issue proceeds will be allocated for CAPEX to expand production capacity (plant extension, acquisition of land, factories, equipment and machineries) with a budget of RM60-80m, followed by repayment of bank borrowings amounted to RM20m and the remaining of RM18-31m as working capital.

However, the exact details/breakdown of the utilization of Warrant proceeds have not been determined but shall also be in the nature of CAPEX, investment opportunities and/or working capital.

Justifications of this corporate exercise include interest / financing costs savings, strengthening financial position and improve equity participation.

This proposal is expected to be completed in 4QCY14.

Comments

Apart from the fund raising methodology, we are not surprise that Inari is embarking on an aggressive expansion plan as this was highlighted in previous report titled “Expect ISK Maiden Contribution by 4QFY14” dated 19 May 2014.

RF’s new plant 5 is already running at near full capacity or utilization rate of 85% although it was recently expended. Inari was already evaluating several alternatives for the next phase of expansion, including using plant 5’s rooftop, acquiring new land beyond Penang Island in BAtu Kwan or procuring a ready factory.

This sends a strong signal that Inari’s RF business continues to enjoy exponential growth underpinned by insatiable global mobile data demand.

Forecasts

Imputed a more aggressive capacity expansion plan for RF segment in FY15. As a result, FY15-16 core net profits were raised by 8.7% and 7.6%, respectively while FY14 was unchanged.

Catalysts

• Wireless communications / mobility / IoT (M2M) / LTE.
• Business diversifications into optoelectronics and T&M.
• Favorable FOREX.
• Continuous effective operational strategy.

Risks

• Single major client risk (Avago) / high dependency.
• FOREX risks.
• Patent disputes.
• Resources / labour shortage.

Rating

BUY, TP: RM3.41

Positives - Synergy from acquisition, 40% dividend payout providing reasonable yield.

Negatives – innovation stalemate in telecommunication.

Valuation

Reiterate BUY after raising TP by 10.4% from RM3.09 to RM3.41 chiefly to reflect the upward earnings revision. Fair value is pegged to unchanged 15.1x CY15 P/E.

Source: Hong Leong Investment Bank Research - 7 Jul 2014