Inari-Amertron on multi-year earnings growth, says CIMB Research

KUALA LUMPUR: Inari-Amertron is on multi-year earnings growth, driven by expansion of its Batu Kawan plant, resilient earnings from radio frequency (RF) and new products such as iris and mixed signal tester, says CIMB Equities Research.

 “Maintain Hold and RM3.40 TP, based on 20 times CY19F P/E (30% premium over the local sector target P/E of 15.4 times),” it said on Thursday. 

CIMB Research thinks Inari deserves to trade at a larger premium over its peers, given Inari’s superior average CY17-19F net margin of 19.6% (its estimates) vs. sector mean of 14%. 

“However, we see minimal re-rating catalysts for Inari in the next three to six months due to earnings pressure from ringgit's appreciation. We advocate to switch to KESM,” it said.     

CIMB Research pointed out Inari increased its radio-frequency (RF) tester capacity from 850 units in Aug 2017 to 970 units in Dec 2017 upon completion of the first phase expansion of its P13B plant. 

During a briefing for analysts, Inari’s management shared that the second phase expansion is underway and scheduled for completion in May 2018. The second phase could add another 200-250 RF tester capacity. 

With this, P13B plant will be the largest plant under the group with a total manufacturing floor area of 340,000 sq ft. 

“We are encouraged to learn that the group is planning to utilise its Batu Kawan land for potential expansion into new product segments beyond RF,” it said. 

To recap, Inari plans to build three new factories in Batu Kawan to service different product portfolios. 

The company is allocating RM60mil for building a 600,000 sq ft production plant in Batu Kawan and is expecting the first plant to be ready in Sep 2018.

“It expects to see stable volume loading of about 8m units/month for iris scanner on the back of new flagship smartphone model launches. 

“However, this is still below its total installed capacity of 16 million units/month. Therefore, the group is also exploring a new range of products to utilise the iris scanner platform. We understand that any potential new products will only come in 1HFY19,” it said. 

Inari plans to consolidate subsidiary Amertron’s operation to Clark Field in the Philippines take advantage of lower tax incentives and new capacity expansion there. 

Currently, Amertron has two production plants -- in Paranaque, Manila and Clark Field. Following the completed expansion of CK2 plant in Clark Field in 2HCY17, the group had increased the total production area from 115,000 sq ft to 205,000 sq ft. It expects the exercise will drive better operating efficiency that will lead to margin expansion.   

“Finally, we expect sequentially weaker earnings in the third quarter ending March 2018 (3QFY6/18) due to seasonal demand weakness, couple with the strengthening in ringgit against US$. The group incurred RM11.7mil forex loss in 1HFY18 vs. RM14mil forex gain in 1HFY17,” it said.