Inari gears up for strong growth

Inari

Inari Amertron Bhd’s aggressive strategic acquisitions over the past two years have paid off handsomely for the Penang-based technology company.

Its annual revenue has tripled and earnings more than doubled within a year, and it seems the days ahead continue to look good for the company that produces key components such as radio frequency chips for smart mobile devices and high-speed fibre-optics connectors for data system applications.

Inari executive vice-chairman Dr Tan Seng Chuan, nevertheless, prefers to remain modest. When asked about the company’s outlook for the financial year ending June 30, 2015 (FY15), he merely tells StarBizWeek: “I can’t say very much about our business outlook for 2015 except that it looks positive at the moment.”

According to the handful of analysts who cover Inari, the growth prospects of the company are indeed exciting.

Hong Leong Investment Bank, for one, notes that Inari is set to be in a “multi-year capacity expansion mode” following recently announced land and factory acquisitions, as the latter remains supported by “insatiable global demand” for its electronic products.

Urgent capacity needs

The key in Inari’s success lies in its position in the right technology, that is, producing electronic components to cater to the booming industries of smart mobile devices, such as smartphones and tablets, and cloud computing and data systems.

According to the International Data Corp, the global demand for smart mobile devices is expected to grow at a compounded annual growth rate of 12.3% from one billion units 2013 to 1.8 billion units in 2018. In addition, Cisco projects global mobile data traffic to register a 10 times jump to 15.9 exabyte per month by 2018, with such growth expected to drive higher usage of fibre-optic components to facilitate faster data transmission.

Analysts say the increasing adoption of smart mobile devices, faster cellular network and cloud computing globally means brisk business for Inari over the next few years.

In fact, business has been so good for Inari that all the group’s production facilities are already running at an average utilisation rate of 85%.

Tan acknowledges the urgent need for the group to ramp up production capacity amid strong demand from its clients.

Tan: ‘It is our strategy to make the best of current semiconductor growth cycle.’

 

The group currently has nine production facilities spread across Malaysia, China and the Philippines. Of these facilities, four under its wholly owned subsidiary Inari Technology Sdn Bhd (ITS) and one under its 51%-owned CEEDTec Sdn Bhd are in Penang.

Inari also has one production facility under another wholly owned subsidiary Inari South Keytech Sdn Bhd (ISK) in Iskandar, Johor; and under its 100%-owned Amertron Inc (Global) Ltd are two plants in the Philippines and one in China.

According to Tan, while the group waits for its new manufacturing plant in Batu Kawan, which is expected to be built only in 2016, to be ready, Inari has been actively looking to buy ready-built factory space to meet its urgent capacity needs.

Already, the group had in the middle of last month, announced its proposed acquisition of a 166,000-sq-ft two-storey factory in Bayan Lepas, Penang.

“We were fortunate to be able to buy the factory … this purchase would roughly double the floor space capacity of our existing plants in Penang,” Tan says.

The purchase of the factory from Hektar Haruman Sdn Bhd will involve Inari subscribing to about RM400,000 worth of the former’s shares, and assuming its total liabilities of RM25.5mil.

The newly acquired plant is expected to immediately address Inari’s production gap for its radio-frequency chips, which is currently running at close to full capacity, and provide space for its other business, especially that of ISK, as the management has indicated its intention to shift some of ISK’s production in Johor to Penang.

Further upside

The progress made by Inari has been astounding.

A year ago, Inari was just a penny stock trading below 80 sen per share on the ACE Market.

But today, the company’s share price and market capitalisation has quadrupled, even as the company moved its listing to the Main Market of Bursa Malaysia in May this year.

Despite Inari’s share price having run up quite significantly in the past one year, analysts believe there is still further upside potential to the counter.

For one thing, at its closing price of RM3.13 yesterday, Inari’s shares are deemed to be trading at an attractive valuation of about 14 times its 2015 estimated earnings, compared with that of industry average of around 17 to 18 times 2015 estimated earnings.

For another, according to analysts, Inari’s 40% dividend payout, which provides reasonable yield amid strong growth prospects, also serves to enhance investor appeal.

Bloomberg’s survey of all the four research houses that cover Inari puts the 12-month average target price of the company’s shares at RM3.93 each.

Last month, Inari saw its group earnings more than double to RM101.27mil, or 21.42 sen per share, for FY2014, compared with RM42.01mil, or 11.19 sen per share, a year ago. The group’s revenue, on the other hand, increased three-fold to RM793.66mil from RM241.14mil.

With ISK, which produces fibre-optic components, and CEEDTec, which manufactures electric test and measurement equipment, expected to start contributing significantly to the group’s earnings from FY2015 onwards, Inari will likely see strong double-digit growth over the next couple of years.

Consensus estimates based on Bloomberg’s poll has projected Inari’s earnings to grow 35% to RM137mil for FY2015, and then to increase further to RM160.75mil in FY2016 and RM192mil in FY2017.

According to Maybank Investment Bank, ISK is expected to account for 5% of Inari’s group revenue in FY2015 and 7% in FY2016, while CEEDTec’s contribution is expected to grow to 5% and 6% over the two financial years.

Affin Investment Bank says it likes Inari for the group’s exciting growth prospects in the radio-frequency segment and rising exposure to the fibre-optics segment, an area which it believes will drive future earnings growth for the group as the demand for Internet data traffic escalates.

Affin adds Inari’s strength also lies in the group’s ability to leverage on its key customers, which are market leaders in their respective fields.

Avago link

While Inari’s established partnership with Avago Technologies Ltd – a key original equipment manufacturer, or OEM, to global electronics players such as Apple, Samsung and LG – is a boon, analysts see Inari’s high dependence on Avago as its single largest client as a risky business.

Avago, which is currently the ninth largest semiconductor company in the world, accounts for about 75% of Inari’s group sales.

To that, Tan explains: “In some sense, Avago is also dependent on Inari, as we are one of the largest EMS (electronics manufacturing services) contractors to the former. Therefore, there is a good win-win relationship based on inter-dependency between the two companies.”

He adds: “The global EMS supply chain today is sufficiently complex that it is not easy for companies to shift production easily, especially if a company like Inari could offer competitive pricing.”

Tan further notes that while Inari derives much of its revenue from Avago, the company is not dependent on any one of the EMS business area, as Inari manufactures for not one, but several of Avago’s business divisions such as wireless, fibre optics, industrial fibre and smart displays, among others.

“Avago has continued to grow strongly over the last few years and has taken up all of our capacity expansion so far. As soon as we have excess expansion capacity not taken up by Avago, we are confident we will be able to diversify quickly to other customers based on our proven track record,” Tan says.

“In the meantime, it is only sound business strategy to grow with a large and strong customer so long as we are not overly committed on our capital investments,” he points out, adding that Inari constantly monitors Avago’s performance.

Meanwhile, Tan concedes that Inari and Avago remain vulnerable to cyclical swings in the global semiconductor business.

Hence, he stresses: “It is our strategy to make the best of current semiconductor growth cycle, so that we can survive the down cycles when they come.”

Forex risks

On concern of the company’s exposure to foreign exchange risk, given the fact that as much as 90% of its revenue is denominated in the US dollar, Tan points out that Inari is already naturally hedged against the greenback as at least 60% of the company’s cost are denoted in the US dollar.

He, however, acknowledges that any mid to long-term excessive weakness of the US dollar against ringgit will have a major impact on Inari’s bottom line.

MIB’s sensitivity analysis suggests that for every 1% increase in the base-case exchange rate of RM3.25 per US dollar, Inari’s net profit for 2015 and 2016 will reduce by about 3%, respectively.

“When the US dollar changes, we usually have room to quote to new exchange rates for new products. But for the affected old/existing products, we have productivity/yield improvements over time to mitigate adverse US dollar movements,” Tan says.