AmResearch reaffirms Buy on Inari Amertron

KUALA LUMPUR: AmResearch reaffirmed its Buy call on Inari Amertron with a higher fair value of RM4.61 a share, as its changes its valuation method to 16 times calendar year 2016 price to earnings ratio (PER). 

This is to better reflect the earnings kicker from oncoming high-margin RF (Radio Frequency) chip production capacities in early 2016, and the price-to-earnings growth ratio of 0.76 times. 

“Our Buy recommendation on Inari is premised on: (1) its superior earnings growth and track record (three-year CAGR of 18.4%); (2) improving product mix as a result of oncoming RF capacities; (3) favourable USD:RM rates; and (4) potential new semiconductor outsourcing contracts,” it said.

AmResearch said during the 1QFY16 results briefing last Friday, management confirmed that RF chips production for its key client, Avago, continues to thrive due to high demand from both the global premium and China smartphone manufacturers. 

Inari’s RF processing business in Penang continues to contribute over 50% of sales and a significant portion of its profits. 

“Management updated that contribution from the RF capacity expansion of the P13 and P13B plants will be flat in 1Q and 2Q but it is predicted to kick in significantly from 3QFY16 onwards. 

“We are estimating a 20% increase in RF earnings in FY16, followed by the remaining 10% contribution from FY17F onwards (total capacity increase of 30%). 

“For FY16F, Inari has budgeted a CAPEX of RM100mil, of which RM35mil will be ploughed into the new P13B factory building and RM24mil will be used for capacity expansion,” it said.

AmResearch said in new developments, it postulates that Inari will be a potential benefactor of new outsourcing opportunities if Avago’s takeover bid of Broadcom goes through. 

Media reports last Wednesday stated that the bid has already been approved by Broadcom shareholders. Broadcom’s Wi-fi chips are used widely in smartphones made by Apple and Samsung.

Osram announced it is setting up a new RM4.6bil LED plant in Kulim, which may cover wafer fabrication. Being its current OSAT contractor, Inari may benefit from potential spillover. 

“To increase stock liquidity, Inari had proposed a one-for-four bonus issue amounting to 206 million bonus shares fully paid-up at par, with an entitlement date to be determined later. 

“Although Inari’s share price has done exceedingly well year-to-date (+65%), we believe that the stock has further upside, given its PEG ratio of under 1 and exciting collaboration opportunities with its key customers. The stock is currently trading at an attractive CY16 PER of 14 times,” it said.