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Thursday, October 27, 2016

Strong earnings visibility seen for Inari Amertron

Thursday, 27 October 2016

PETALING JAYA: Inari Amertron Bhd is poised to see strong earnings visibility with profitability coming in at a compounded annual growth rate (CAGR) of 20% in the next two to three financial years, underpinned by organic growth and new income streams, said UOB KayHian.

The research firm also noted that the semiconductor player is a beneficiary of the strengthening US dollar and a “1% change in our RM4:US$1 assumption would change net profit by about 2%”.

“We see room for multi-pronged expansion and project a strong net profit CAGR of 20% in FY2016-2019 for Inari, driven by new income streams from Broadcom and Osram, besides the still-growing bread-and-butter radio frequency (RF) segment.

“Broadcom’s and Osram’s heavy investments in Malaysia anchor Inari management’s ambition to vertically integrate its outsourced semiconductor assembly and test (OSAT) capabilities and continuously create breakthroughs in its search for new sources of income,” UOB KayHian said in an initiation report on Inari yesterday.

The research firm has a target price of RM3.85 for the stock pegged to 17 times fully-diluted FY2018 forecast price to earnings.

This implied a price-to-earnings growth ratio of 0.77 times.

“Inari’s premium over its local peers is justifiable given its strong earnings visibility and further accretion from a potential joint-venture with Taiwanese company PCL Technologies group, and merger and acquisition activities,” UOB KayHian said, noting that Inari provides a prospective dividend yieldsof 3-3.6% based on a 50% payout ratio, backed by net cash of RM176mil.

Its shares closed 1 sen up to RM3.33 at last look.

The research firm noted that market trends for Inari’s products - in the areas of data centres (cloud storage and big data) and fibre optics (fibre to the home, IoT) and higher-bandwidth data centres - remain positive.

“While there is concern over slower growth in global smartphone shipments, there is a market trend of increasing RF content per phone and increasing deployment of Long-term Evolution.”

RF accounted for about 45% of Inari’s revenue in FY2016.

Inari also benefits from its decade-old collaborative partnership with chipmaker Broadcom Ltd that has a high-margin focus and enlarged product portfolio following the latter’s merger with Avago Technologies Ltd.

Broadcom has outsourced its fibreoptics chip fabrication and wafer certification jobs solely to Inari in 2015.

The multinational is likely to streamline its supplier pool and stick to the cost-effective ones, as evidenced by its award of testing jobs for switches (data centre application) to Inari in early 2016 , according to the report.

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