Share price doubled in eight months. Since our Trading Buy call on 17^th Dec 2013 at RM1.59, Inari Amertron (INARI)’s share price has performed tremendously well by more than doubling to RM3.34. This clearly outperformed the benchmark FBM Small Cap Index, which only advanced by 23.4% to 19,331.8, over the same period.

Resilient medium-term prospects with Radio Frequency (RF) to be the key growth driver going forward. With the ongoing huge orders for the group’s RF products due to resilient demand for Smartphones/Tablets (note that the current utilisation rate (UR) for all of its plants are already at near full capacity), we believe that the group would utilise part of its proceeds from a recent proposed rights issue with warrants amounting to between RM100.3m-RM133.2m to expand its RF assembly capacity. From our back-of-theenvelope calculations, assuming another new plant for RF postannouncement of its new land acquisition at Batu Kawan Industrial Park and assuming another c.30% YoY volume loadings in RF, the group’s NP could see at least an additional RM26m assuming an UR of c.85%. Meanwhile on its lion share revenue contributor, Amertron, we expect decent earnings contribution from its Optoelectronics segment with better cost management as well as higher operational efficiency. We also expect its 51%-owned subsidiary, CEEDTec (which is the ODM for Electronic Test and Measurement Equipment), to see double-digit growth in FY15 (from low base) with the new pipeline of products to be introduced to Agilent. All in, we are projecting the group to register FY14E NP of RM97.6m and FY15E NP of RM138.4m.

1-for-8 rights issue to raise funds mainly for expansion plans. To recap, Inari has proposed to undertake a renounceable 1-for-8 rights issue of up to 88.8m (min. 66.8m) new shares at an indicative price of RM1.50 per rights issue together with free detachable warrants of up to 88.8m (min 66.8m). According to the announcement, the gross proceeds of between RM100.3m-RM133.2m raised will be mainly used for the expansion of its production capacity and repayment of bank borrowings. Meanwhile on the effects of fully diluted basis, the proposed rights issue (66.8m-88.8m) with warrants (66.8m-88.8m) coupled with the existing warrants (112.7m) and outstanding ESOS options (63.1m) will increase the existing issued and paid-up share capital of 534.8m to a minimum of 844.3m shares and a maximum of 888.3m shares. In our assumption for enlarged share capital base ex-rights, we have assumed full conversion of its existing warrants (112.7m), full conversion of its outstanding ESOS options (63.1m) and a right issue of 88.8m on a 1-for-8 basis which add up to 799.4m enlarged share capital base [calculation: (534.8m+112.7m+63.1m=710.6m )+(710.6m/8)]. Note that our calculations do not include any conversion of new warrants as we understand that any conversion of new warrants will be staggered over a 5-year period. All in, our new FY15E EPS (assuming a half-yearly enlarged share capital base effect totaling to 667.1m given that the exercise is expected to be completed in 4QCY2014, coupled with the new capacity expansion from its RF operations from proceeds financing) will be 20.7 sen. By ascribing a forward FY15E PER of 16.0x, the ex-price TP will be RM3.31.

Current valuation appears fair. While the group’s earnings prospects remain resilient with higher visibility post its Main Market listing; in terms of valuation, however, INARI is currently trading at a forward PER of 16.0x (cumrights, before the earnings assumption from the new capacity expansion of its RF operations) which is at 24% premium to the FBM Small Cap forward PER of 12.9x and only a mere 8% discount to its peers’ forward PER, which we deem as fair at this juncture. Judging from all the parameters mentioned above, we see not much capital upside from here. Hence, we advocate investors to take profit for now and re-accumulate on price weakness should such an opportunity emerges.

Source: Kenanga