Inari’s share price continued its positive momentum – hitting an all-time high  of  MYR3.33  on  5  Mar  after  going  ex-rights  on  20  Jan  –  and  we attribute  this  to  its  improved  earnings  visibility,  leveraging  on  the MYR’s  weakness  against  the  USD. Maintain  BUY,  with our  TP  lifted  to MYR3.74 (from MYR3.41, 18x FY16F P/E, 14% upside) as we roll forward our valuation to FY16.

The  MYR  factor.  The  recent  weakness  of  the  MYR  against  the greenback  should  help  to  improve  Inari  Amertron’s  (Inari)  earnings growth  when  its  3QFY15  (Jun)  results  are  released  in  April.  The USD/MYR  rate  has  averaged  at  MYR3.60  YTD  vis-à-vis  4Q14’s MYR3.37 (+6.8% QoQ) and 1Q14’s MYR3.30 (+9.1% YoY). We do not rule out the possibility of short-term volatility on a further upside, judging by  the  current  condition  of  the  global  macroeconomic  environment. Based  on  our  estimates,  the  company  could  potentially  enjoy  an earnings  upgrade  of  3-5%  for  each  1%  decline  in  the  MYR/USD exchange rate, assuming everything else remains constant.

Updates  on  operations.  Management  is  looking  to  install  150  more testers  for  its  radio  frequency  (RF)  division  at  its  new  plant,  known  as P13,  over  the  next  12-18  months.  This  will  increase  its  capacity  by almost  30%  from  522  tester  units  currently.  We  expect  commercial production  to  commence  from mid-2015,  upon  obtaining  the  necessary qualifications  from  its  customers.  Management  reiterated  its  target  net profit  margin  of  10%  (from  7%  currently)  under  the  Amertron  division within the next 12-18 months.   

Forecasts  and  risks.  We  upgrade  our  FY15F-16F  EPS  by  4.6-4.9%, taking  into  account  our  revised  USD/MYR  assumption  of  an  average MYR3.60 for 2015 (from MYR3.50) and after tweaking our opex structure for housekeeping purposes. Key risks to our earnings estimates include: i)  strengthening  of  the  MYR  against  the  USD,  ii)  higher  raw  material costs, and iii) a potential slowdown in the semiconductor market should consumer spending tighten.

Maintain BUY. All in, we maintain our BUY call, with our fully-diluted TP now  at  MYR3.74  as  we:  i)  update  our  SOP  valuation  following  the completion  of  its  rights  exercise,  and  ii)  roll  forward  our  valuation  to FY16.  We  expect  its  FY15-16  earnings  momentum  to  be  driven  by  a favourable forex environment, while full earnings accretion from P13 will likely kick in come FY17.

Financial Exhibits

SWOT Analysis

Company Profile

Inari  Amertron  (Inari)  is  involved  in  the  electronics  manufacturing  services  industry  as  a  provider  of  semiconductor  packaging  and testing  devices for  components  used in  radio frequency  (RF)  wireless  devices.  The  group  also  designs,  develops  and manufactures equipment and components for testing and measurement as well as fibre optic transceivers.

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Source: RHB