Short Position - Inari's placement, commodities, investing

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Inari’s massive placement

Inari Amertron Bhd’s plan to raise up to RM1.07bil via a private share placement exercise has raised eyebrows.

Firstly, the sum is a huge amount, making it one of the largest private placement exercises in recent times. However it should be noted that the amount being raised equals only to around 10% of the company’s RM10.7bil market capitalisation.

Secondly, the company is already in a net cash position of some RM750mil, and will generate more cash considering its rising earnings. Finally is the question of dilution that the placement will bring about.

Hence it begs the question of why not carry out a rights issue to raise the RM1bil, giving all shareholders a chance to participate? But there could be plausible explanations.

Inari is a growing name in the semiconductor space. Meanwhile, the world is experiencing a shortage of semiconductors not seen before. Amidst all this, Inari must be facing opportunities for new business, expansion and mergers and acquisitions. In such instances, time is of essence if the right opportunities are to be captured.

Carrying out a rights issue will take time, likely up to four months. A share placement exercise for Inari, on the other hand, could be an expeditious transaction. More so if there are already investors lined up ready to take up the placement.

What is important though is for Inari’s next moves following the injection, whether they are in winning new customers or acquiring a new business, to result in a higher earnings per share impact compared with the dilution that its minority shareholders are going to suffer from the placement.

In such an instance, those shareholders will have nothing to complain about, as their company would have become more valuable without them having to fork out any money towards that.

The downside of upside

On uptrend: Oil palm companies have been enjoying prices that are north of RM4,000 a tonne for some time. — BloombergOn uptrend: Oil palm companies have been enjoying prices that are north of RM4,000 a tonne for some time. — Bloomberg

THE rally in global commodities markets has been strong since the recovery started. Virtually across the board, prices of commodities from industries like basic metals to agriculture products have been rising strongly and in Malaysia, the three main ones have been palm oil, crude oil and steel.

The rise in such prices have seen a corresponding increase in the share prices of companies on Bursa Malaysia that are linked to those industries. Shares of steel stocks have rebounded strongly in anticipation of better profits, and some have announced bumper numbers.

The oil palm companies have been enjoying prices that are north of RM4,000 a tonne for some time and the index that tracks those stocks too have reacted to the upward swing over the past few weeks.

The anomaly of stronger profits could be down to the strong resumption of business activity and stock piling. For commodities, supply and stockpiles too influence prices and on both accounts, there is reason for planters to see such high prices, given also the shortage of workers to harvest the crop.

But to every bullish scenario, there is going to be a reaction in the other direction. Inflation is on the up because of the high commodity prices. In Malaysia, the benchmark inflation is higher because of the base effect of high prices today compared to when prices collapsed at the early days of the Covid-19 pandemic.

With wages and employment slowly recovering at best, higher prices will put pressure on affordability and net pay but it will also encourage employment in industries that are seeing such high prices.

The other drawback is on construction activity. The high price of steel would send the cost of projects upwards and for all the planned projects that are in the pipeline, there could be variation orders that could mean actual spending can be higher than what has been budgeted for.

Taking a calculated risk

COMPANIES invest for many reasons. Normally, it is to grow their own operations and sometimes, it is to take advantage of opportunities that are unrelated to their core business.

Listed companies have taken stakes in other companies that are unrelated to what they do. We have seen glove companies go into property development and unrelated healthcare. For construction companies, there have been instances they have invested their money in other listed companies for capital gains.

We also see the web of cross holdings taking place in a select group of companies that seemingly have a common shareholder involved. These stocks are often among the most actively traded on a rotation basis on the stock exchange.

When Serba Dinamik Holding Bhd announced it was putting RM24mil into a special-purpose acquisition company (SPAC) in the US, that investment will pique the interest of many as the engineering company has made it a habit of winning big projects even during the pandemic-ridden times.

The amount of money it is investing in the SPAC is not large but is seen as another way of locking in gains from a red-hot SPAC market that is flushed with liquidity throughout the global capital markets.

Investing in a blank-cheque company can been seen as taking a calculated risk in trying to generate some extra income but it should not detract from what the company is used to doing.

Its shares have been on a downtrend since March 15 and maybe it can spark some interest on the other way, especially when the investment by the SPAC can be in data centres and Internet technology sectors, something Serba Dinamik does not have exposure to.

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