INVESTMENT MERIT

Solid earnings track records with 5-year PATAMI CAGR of 40%. Inari Amertron, one of the electronics manufacturing services (EMS) players with high exposure in the Smartphone & Tablets (S&T) segment within the semiconductor industry, has remained profitable for the last 5 financial years achieving a 5-year CAGR of 40%. With its recent acquisition of Amertron, the group has enriched its portfolio from mainly focusing in the S&T segment to the aerospace, defense and automotive industries. This enables the group to ride on the strong wave of the S&T upcycle as well as capitalising on the defensive qualities of the matured high-volume semiconductor industries.

Acquisition to spearhead its earnings growth. Thanks to the consolidation of earnings from the newly acquired Amertron (with revenue growth of 250% YoY in 1Q14), net profit (NP) of the enlarged group in 1Q14 soared by 179% YoY despite the lower blended NP margin of 11.0% (diluted from 13.8% in 1Q13, due to Ametron’s different product portfolio). If we were to strip out the Ametron top line figures, Inari’s revenue still grew organically by 30% YoY underpinned by its continual capacity expansion. While we are aware of the lower blended NP margin post consolidation, we understand the margin could improve further with higher operational efficiency going forward amidst the integration of operations.

Promising outlook. Inari’s bread and butter business, assembly of radio frequency (RF) chips for Avago Technologies (comprises c.75% of total revenue) has made it a direct proxy to the fast growing S&T segment. With the Long Term Evolution (LTE) being the next phase of evolution from the current HSPA+ technology, Inari’s expertise in RF products has positioned itself for the next growth phase. All in, management expects its Plant 5 to increase capacity by another 15% which we believe could translate into additional RM6m to the bottom-line assuming an utilisation rate at c.85%. Coupled with the recent operational breakeven of Ceedtec (a 51%-owned subsidiary which provides engineering solutions focussing on R&D and product development) as well as the earnings consolidation from Amertron, which has seen rising demand for its fibre optic products, we expect its FY14 and FY15 earnings to increase by 85% and 29% respectively.

Strong balance sheet to support dividend payout policy of 40%. Post acquisition, we understand that the group’s net gearing still remained low at 0.16x. Coupled with its sustainable earnings profile, we believe the group could offer up to a FY14E DPS of 7.0 sen translating into a decent dividend yield of c.4.4%, assuming 40% DPR.

Trading Buy @ TP of RM2.10. We value the stock at RM2.10/share @ 12.0x FY14 PER, which is at a +2SD level above its 2-year average forward PER as we view that its: (i) earnings stability, which makes it less vulnerable to the semiconductor cyclical volatility, (ii) robust FY12-FY14E NP CAGR of 98%, (iii) high exposure to the booming S&T segment, and (iv) rising investability as it is en-route for Main Market listing (expected by 1Q2014), should deserve a premium valuation.

TECHNICALS

Resistance: RM1.74 (R1), RM1.88 (R2)

Support: RM1.40 (S1), RM1.30 (S2)

Comments: Even with the stellar gains this year, INARI’s technical picture remains bullish. The share price broke out of a “Bullish Pennant” just last week, which heralds a continuation of an uptrend towards RM1.74 (R1) and possibly RM1.88 (R2) next.

BUSINESS OVERVIEW

Inari Amertron Berhad is an investment holding company which was established in 2006 with subsidiaries involved in the electronics manufacturing services (EMS) industry. Inari Amertron Berhad currently has five wholly-owned subsidiaries: Inari Technology Sdn Bhd, Inari South Keytech Sdn Bhd, Simfoni Bistari Sdn Bhd, Inari International Limited, Amertron Inc (Global) Limited with total of nine manufacturing plants in Malaysia, China and Philippines. Inari Amertron Berhad also has a 51% subsidiary, Ceedtec Sdn Bhd.

BUSINESS SEGMENT

The group’s business activities are mainly categorised into:

Integrated Semiconductor Packaging and Testing Services: Ranging from back-end wafer processing services to final packaging and testing.

Optoelectronics Manufacutring, Testing and Assembly: Manufacturing, testing and assembly of optoelectronics components.

Original Design Manufacturing (ODM) of Electronic Test and Measurement Equipment: Design, development and manufacturing of electronic test and measurement products.

Fibre-Optics Research, Design and Manufacturing: Design and production of fibre optic connectors with Class 10 Cleanrooms.

Source: Kenanga