Certainly as you all can see, our long-term pick INARI had prices crashing deeply with multiple bad news queued all the way to Apple cutting its production.

With our initial reference price call at RM 1.96, it had dropped significantly by more than 30%, but hope is still there. It is better to deal with it using a smarter way rather than cutting loss on the position that might be worth a lot more in the future.

Times like this, it is important that we re-evaluate the sanity of the targeted numbers.

Oversold?

We look at the current price of RM 1.30 trading at PE of 17 with a market capitalization of RM 4 billion. At one time, it was trading at a market cap of RM 7.6 billion and that meant the company lost almost of its value in Q4 2018 alone.

Markets do get over-bought during a boom and similar goes to being over-sold during a boom. Certainly, we felt that it gets oversold this time around. But is this the bottom?

Nobody can quite tell us because market forces are determined by the bigger holders of the share rather than so called ‘natural forces’ you see for forex markets, etc.

More efficient markets like forex would see prices jumping quickly when it gets oversold. For shares, larger shareholders kind of control the movements within a certain band when they rebalance their portfolio.

We believe that the share entered the oversold territory with continuous negative news battering it in the market. But we are not adding into our position just yet! The continuous negativity might not be over yet and if you think that Apple’s news is already bad enough, it might not be it.

We chose to stay cautious before adding more to our portfolio. Much similar to the reaction of not catching a falling knife in the world of technical analysis.

Is the Earlier Buy Safe?

We think that the revised target (due to Apple numbers) are too high for FY2019 to see the share price going above RM2.00. But this is still not a call to cut the position as we believe the re-rating would only come in 4th quarter of 2019. That would be reporting period for August 2019 in our calendar.

The original buy call was placed due to the upcoming contract by Osram rather than the continuous revenue generation through Broadcom.

Certainly, the Apple cut was a pain where the Osram part built might make its way into Apple’s phone or wearable devices in the future such as facial recognition and health sensor. But the revenue revision from Apple isn’t that big after all (6% of revenue reduction).

In short, you will not see prices jumping above RM2.00 in the near term.

EPS Targeting

Take this scenario, even if we lower the EPS generously by 20% based using FY2018 numbers to 7.144 cents a PE targeting of 20 and could still achieve a target price of RM1.42. Which is why we felt that the counter had became oversold at this point and undervalued.

We believe the Apple revenue revision isn’t affecting Inari as what the market sees and initial targets still hold with a zero growth FY2019 but a 20% growth in EPS for FY2020.

With a PE targeting of 20, our target price for 2019 would be RM1.78 for 2019 and RM2.14 for year 2020.

Conclusion

Although it seems these numbers are estimates and worse could still be happening, we believe that the prize would be the capacity increase in year 2020. New revenue streams would begin to pour in and so as the growth in EPS.

Three of the biggest plant in the portfolio of Inari each with over 200,000 sqft in built up area would be constructed and this is where the expansion of revenue would come from.

Obviously the risk is being built and no contracts come into place but at the moment, the Osram contracts seems solid.

Sell side analyst reports had revised down the target for FY2019 but we think that as a personal investor, it is a great time to pick up oversold items.