Inari’s share price  is  set to go ex-rights today based on a ratio of 1-for-8.  Maintain  BUY  with  our  ex-rights  TP  adjusted  to  MYR3.41  (17.5x CY15F P/E, 25.3% upside). We continue to advise investors to subscribe for the  cash call  as the  exercise  will  help  to  fund  its  expansion  plans and hence propel earnings growth over the medium term. 

Salient  details.  The  rights  price  of  MYR1.50  represents  a  discount  of 44.8% to its ex-rights price of MYR2.72,  based on its last closing. At its existing  share  base  of  629.6m  shares,  we  estimate  that  the  rights issuance could raise gross proceeds of over MYR115m.  This would help to  partially fund its  FY15-17F capex, of which management is looking to allocate  MYR80m  for  the  radio  frequency  (RF)  division,  MYR20m  for transceiver research and development (R&D), and MYR40m for potential new business set-up. 

RF  growth  to  propel  earnings.  On  its  existing  RF  division,  we  had  previously  highlighted that  the  existing capacity is almost fully occupied at  an average  utilisation rate  of  over  85%.  Management is currently in the midst of setting up a new production plant known as P13 to  cater for future growth opportunities within this segment. This new facility will host additional  80-100  test  handlers  (from  460  units  currently).  We  expectcommercial  production  to  commence  in  2QCY15  upon  obtaining  a qualification notification from its customer by Feb 2015. 

In-the-money warrants.  The exercise price of the warrants at MYR2.00 implies  a  discount  of  26.4%  over  its  ex-rights  price  of  MYR2.72.  This would entice investors to subscribe for the rights as the warrants will be issued deep in the money. Based on our calculations,  Inari Amertron’s(Inari)  share price ex-rights and ex-warrants (given that it is deep in the money)  would  be  adjusted  to  MYR2.65  (from  its  ex-rights  price  of MYR2.72).

Maintain BUY. We continue to advise investors to subscribe for the cash call  as we believe the  exercise  will help  to  fund  its expansion plans and hence propel earnings growth over the medium term. All in, we maintain our BUY call with our  ex-rights  TP  adjusted to  MYR3.41  (17.5x CY15F P/E,  25.3% upside).  Upon completion of the rights issue and assuming full  conversion  of  the  new  warrants,  Inari’s  fully-enlarged  share  base would increase to  804.5m, while we would tweak our TP accordingly to MYR3.07.

Source: RHB