Inari edges ahead in semiconductor industry

Electronic manufacturing services provider Inari Amerton Bhd may be riding high on the favourable foreign exchange rate, but the company says pricing and hedging strategies have allowed it to sustain its operations in the semiconductor industry.

“In our business, we do hedge calls all the time and this has made us sustain in the business throughout the years.

“The pricing set by our one and only customer that designs and develops components for the industry, has given us the competitive edge in the business,” says group vice-chairman Dr Tan Seng Chuan at the group’s fourth quarter results briefing yesterday.

But there is a downside to it if the ringgit depreciates further, Dr Tan says, adding that it will be detrimental for the industry in the longer term, as wage inflation is likely to set in as well.

“We buy our equipment in US dollars. So, in a time like this, it can be costly, especially when have only started paying for some of the new ones,” adds Dr Tan.

Inari provides manufacturing services and support to the radio frequency, optoelectronics, fibre-optics and testing and measurement equipment sectors.

Its radio-frequency components are widely used in smartphones and tablets and the transition towards the 4G network has seen an earnings boost in Inari.

The company has 10 plants, of which six are in Penang, two in the Philippines and one each in Iskandar Malaysia, Johor and China.

Its Clark Field plant in the Philippines was recently expanded by another 80,000sq ft. Production is slated to start in May 2016.

While the minimum wage scheme in China two years ago has made it costlier for the group to operate in China, Dr Tan says the recent depreciation of the yuan has also made it tough.

“It’s no longer cheaper to manufacture products in China,” he points out, adding that it has no plans to wind down its operations there.

Although sales of 2G and 3G smartphones are seen to be slowing, Dr Tan is confident that it has the production capacity to meet the growing demand of 4G networks.

At present, the RF segment contributes 50% to the group’s revenue, while the remaining are from optoelectronics, fibre-optics and testing and measurement equipment sectors.

Its newly launched fibre-based optical cables is expected to contribute RM20mil to the group’s revenue.

This is Inari’s first own brand produced and fully-assembled at the Inari South Keytech Sdn Bhd plant in Senai, Johor.

The company pumped in RM20mil for the new product, which falls under the optoelectronics segment.

The production capacity for the new product line now stands at 30,000 units per month.

“This is in line with our vision to move up the optoelectronics value chain and improve margins compared to our existing outsource and contract manufacturing business,” says Dr Tan, adding that it aims to achieve 5% world market share by year 2017.

For the fourth quarter ended June 30, 2015, the group’s net profit rose 40.2% to RM40.38mil from RM28.79mil, a year ago against a revenue that jumped 13.9% to RM255.02mil from RM223.88mil.

Basic earnings per share for the current quarter under review was 5.57 sen compared with 5.81 sen the previous year. A fourth interim single tier dividend of 2.3 sen was declared.

For the cumulative period, its earnings leaped 53.7% to RM152.53mil from RM99.22mil in the corresponding period a year ago. Revenue was up by 17.6% to RM933.10mil.

Basic earnings per share rose 23.82 sen from 20.98 sen, a year ago. Dividend was up 8.90 sen from 6.80 sen.

Inari attributed the better performance to higher trading volumes in the RF business, where the demand for smartphones and mobile devices had increased, backed by the stronger greenback.

It is on track to hit its RM1bil sales target for FY16 based on the group’s key performance index announced in 2013.

Although growth in emerging markets and developing economies is projected to be slow at 4.2%, from 4.6% in 2014, the worldwide semiconductor market is forecasted to be up 3.4% to US$359bil in 2016 and US$370bil in 2017.

Based on its financial performance, the company’s profit margins have increased to 16.2% for FY15 compared with 12.5% in FY14. Its profit margin for FY13 was 17.4%.

The company has projected to spend RM40mil in capital expenditure for new equipment annually.

The stock has surged about 76.41% since October 16, 2014 to RM3.53 on June 1, 2015.

The stock is now trading at around RM3.03. And at the current stock price, it is trading with a historical price earnings (PE) of 13.07 times with a forward PE of 12.47 times.

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