Inari Amerton ‘buy’, Sapura Kencana 'hold"


INARI AMERTON BHD

By AmResearch

Buy (initiation)

Fair value: RM3.83

AMRESEARCH has initiated coverage on Inari with a “buy” and a fair value of RM3.83 per share, based on a fully-diluted price-to-earnings ratio of 15 times on the company’s 2016 forecast earnings.

The coverage initiation is also based on Inari’s high exposure to the surging growth for its key radio frequency (RF) chips.

Amresearch said Inari had five RF chip assembly and testing facilities in Penang catered specifically for the back-end processing of (client) Avago’s RF chips.

The research house estimates that more than 70% of Inari’s earnings are derived from high margin RF contract manufacturing.

Due to high demand from Avago, Inari’s RF facilities have been operating at full capacity and have been steadily increasing its production capacity since 2013. Due to Avago’s superior RF technology, its RF chips are used by top-tier smartphone devices globally. It is also highly sought after by smartphone companies in China such as Lenovo and Xiaomi, which use it to leverage on the recent growth of long-term evolution.

Hence, Inari’s continued growth is tied to the general growth of the smartphone market.

SAPURAKENCANA PETROLEUM BHD

By Affin Hwang Capital Research

Hold (maintained)

Target price: RM2

SAPURAKENCANA Petroleum Bhd reported first half core net profit of RM365mil for the first half ended July 31.

Excluding the provision for impairment on oil and gas properties in the current quarter and normalisation of other one-off expenses, the first half core net profit of RM710mil is stronger than expected, accounting for 68% of full-year consensus and Affin Hwang Capital Research’s forecasts.

On the engineering and construction segment, second-quarter revenue increased by 49% quarter-on-quarter to RM1.6bil largely due to higher contribution from international projects as well as higher activities from the Pan Malaysia contract and Lumut Yard, which helped increase pre-tax profit by 76% quarter-on-quarter to RM300mil.

On the drilling segment, second quarter revenue was relatively flat at RM800mil as a lower utilisation rate partly offset the positive impact of a stronger US dollar versus ringgit.

Pre-tax profit was at RM200mil likely due to cost-cutting measures.

In the energy segment, second-quarter revenue was up 8% on-quarter at RM400mil due to the stronger US dollar per barrel.

Affin Hwang raises its financial year ending Jan 31, 2016 core net-profit forecast by 9.6%, after raising billings and margins for the engineering and construction and drilling segments. The outstanding order book remains strong at RM23bil, providing a fair amount of billing visibility in 2017 estimated financials and beyond.

However, Affin Hwang expects the operating environment to become more challenging, including continued operating losses in the Newfield project and a weaker utilisation rate in the drilling segment, with four drills out of contracts currently.

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