By Sherilyn Goh
A star performer when first debuting on Bursa Malaysia’s ACE Market in 2011, Inari subsequently saw its share price quadrupled after integrating its acquisition Amertron into the company in 2014. Amidst macroeconomic headwinds and moderating demand in the semiconductor sector in 2015, can the group continue charting its growth story going forward?
Business model: Incorporated in 2006, electronics manufacturing services provider Inari Amertron Bhd made its debut on Bursa Malaysia’s ACE Market in 2011, and was subsequently transferred to the Main Market effective June 3, 2014.
Based in the northern state of Penang, the group engages principally in the business of back-end semiconductor packaging services, providing back-end wafer processing, package assembly, and radio frequency final testing.
Inari had secured a three-year manufacturing contract from US-listed company Avago the same year it commenced operations in 2006, providing outsourced assembly and test services to the Nasdaq company. Inari has since then seen the contract renewed twice, first in 2010 and subsequently in 2013.
One of the top three radio frequency chipmakers in the world, Avago continued to become the group’s single largest client until today, contributing close to 70% of the Inari’s total revenue. Respectively in 2007 and 2008, Inari expanded into back-end wafer processing and radio frequency testing to become a one-stop semiconductor packaging services provider for Avago.
In an effort to diversify its business portfolio, Inari had also acquired a 51% stake in CEEDTec in 2012 for a total consideration of RM3.6 million. CEEDTec is an original design manufacturer of electronic test and measurement equipment, and counts Agilent among its key clients. It was also during the same year that Inari South Keytech Sdn Bhd was established to venture into manufacturing and assembly of fibre optic components.
In June 2013, Inari acquired Amertron in an RM103 million deal to add optoelectronics and fibre optic packaging services to the range of services the group provides. With nine production facilities across Malaysia, China, and the Philippines, the group’s workforce is made up of close to 5,000 employees today.
Shareholders and management: Inari was jointly established by Ho Phon Guan, Mai Mang Lee, and Tan Lee Pang in 2006, all of whom boast more than two decades of experience in the semiconductor and electronics manufacturing industry.
Both Ho and Mai still sit on the board as the group’s executive directors. Ho, aged 59, is charged with Inari’s technology roadmap and customer relations; while Mai, aged 55, oversees Inari’s manufacturing facilities, equipment, and deals with governmental issues.
The group’s current chief executive officer Lau Kean Cheong, aged 47, has helmed the company since 2011, while similarly possessing 20 years of experience, previously serving companies including Intel Penang, Kesp, and Globetronics Technology.
Inari Amertron’s main shareholder is Insas Bhd, an old-hat on the local stock exchange, with a one-third stake. Other important shareholders are Macronion Sdn Bhd with a 6.9% stake and executive director Ho with a 5.8% stake.
Share price performance: The stock has seen its fair share of ups and downs in the past few months, even to the extent of hitting a three-month low of RM3.06 on Aug 10.
But as seen in its 52-week range, its share price has been generally on the uptrend. Historical share price of Inari Amertron also shown that a sharp decline in Inari’s share price is shortly to be followed by a rebound.
Inari Amertron closed on Aug 11 at RM3.09, up 3 sen.
Inari Amertron has a dividend policy of distributing 40% of profits as dividends, of which the group has met or even beat in the past few years. AllianceDBS Research is expecting a net dividend yield of 2.4% to 3.7%, with the 40% payout in financial year 2015 (FY15)-FY17 forecast (FY17F) as underlying assumption.
What analysts think: The second quarter of 2015 (2Q15) saw global semiconductor sales hitting US$84 billion (RM330 billion), a 2% year-on-year (y-o-y) increase from 2Q14. In June, total semiconductor sales rose at a slower pace of 2% y-o-y to US$28 billion.
Despite macroeconomic headwinds and moderating demand, TA Securities noted that the global semiconductor sector has gone on to achieve another record quarter, with the market showing positive y-o-y growth for 26 consecutive months.
Year-to-date, sales grew by 3.9% y-o-y, which is well within the estimate of 3.4% y-o-y growth to achieve US$347 billion in 2015.
While weaknesses have been cited across end markets in the personal computers, smartphones, and industrial segments which could potentially soften demand, TA Securities expect these short-term weaknesses to be offset by a continued weakening of the ringgit, which is likely to benefit local players including Inari Amertron whose sales are mainly transacted in the US dollar.
According to AllianceDBS Research, Inari Amertron’s radio frequency segment has grown significantly since its listing in 2011, on the back of Avago’s market leadership in producing radio frequency chips.
“We expect demand for Avago’s radio frequency content in smartphones to continue to grow rapidly in the medium term, underpinned by the rising adoption of fourth-generation Long-Term Evolution, smartphone variant consolidation, and integration of radio frequency modules,” said AllianceDBS in its report published on Aug 5.
To cater to the expected increase in radio frequency volumes, the group has also doubled its Penang manufacturing floor space with its new P13 plant. Capacity for its radio frequency segment, according to AllianceDBS, will expand by 30% by September 2015 and another 30% by the second half of 2016.
The research house also noted that plans to add another plant, targeted to increase 30% of floor space capacity, is also in place and may see its implementation within the next 12 months.
Convinced that the stock is deserving of trading at a premium to its peers due to its solid partnership with Avago, AllianceDBS initiated coverage with a “buy” call on Inari Amertron, at a target price of RM4.20, at 16 times fully-diluted calendar year 2016 earnings per share.
Earnings forecast:
Peer comparison:
StockStalk: Driven by strong fundamentals, Inari Amertron appears to be well prepared, both operationally and financially, to withstand short-term fluctuations in demand within the semiconductor industry. While being a beneficiary of the strengthening US dollar, it is also worthy to note that the group currently posts a healthy balance sheet position with a net cash holding.
The group’s margins are also expected to rise going forward, driven by better economies of scale from higher volumes, cost-saving initiatives being conducted at Amertron, larger contribution from the radio frequency segment, and a stronger greenback.
Inari Amertron’s effective tax rate is also expected to remain low at 4% to 6% in FY15-FY17F as its tax incentive due to its pioneer status will only expire on March 30, 2017.
Beyond FY17, it is also understood that there is a fair chance of renewal due to integration of more advanced radiofrequency technology.
Associating risk factors to consider include the fact that the group is hugely reliant on Avago as its revenue and technology contributor. While the ongoing relationship remains strong judging by the expansion in production capacity, introduction of better technology by Avago’s peers could risk Inari Amertron losing sales in relation.
The slowdown in smartphone sales volume is also a trend to be observed closely as it affects the demand for radio frequency chips.
In a slow but growing sector, Inari Amertron seems to be a good value add to investors’ portfolios on the basis of its strong fundamentals. Those who have yet to stake a claim on the semiconductor and optoelectronics player may want to pick up the stock while it trades below fair value of RM4.20.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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