Case Analysis Of Inari

Inari specializes in manufacturing services and support for Radio Frequency, optoelectronics, fiber-optics, testing and measurement equipment. As the mobile devices industry is transitioning into the 4G LTE network, the radio-frequency components produced by Inari are widely used in smartphones and tablets. Thus, it created an earnings boost for Inari as the RF segment contributed 50% to the group’s revenue. An addition to that would be Amertron’s products consisting of optoelectronics and fiber optics (R&D and manufacturing) which highlights good prospects in generating profits for the group. The recently launched fiber-based optical cables are expected to generate RM20million to the group’s earnings.
The RF chips produced by Inari are non-substitutable
[Appendix F(ii)]
Besides, Avago thrives as there was high demand from both premium and low-end smartphone manufacturers. Meanwhile, if Avago’s takeover bid for Broadcom materializes, Inari will be a promising benefactor as there will be additional outsourcing opportunities. Broadcom is a supplier of Wi-Fi chips for Apple and
Samsung smartphones. The merger between Avago and Broadcom is highly probable as on 10th of November, Avago’s shareholders had approved the merger.
Due to the long term relationship between Avago and Inari, it is expected that
Avago will have face a high switching cost if it were to switch supplier for its RF chips. Based on the smartphone teardown results, Avago is also dependent on Inari to provide RF chips to maintain the quality of Avago’s products.
Investment Summary
We issue a BUY recommendation on Inari Amertron Berhad with a target price of
MYR4.72, pegged to a 17x P/E. This represents an upside of 6.31% from its closing price of MYR4.44. This valuation is supplemented by many merits of which we have outlined below:
Potential Increase in Demand for EMS Products
23.8%
13.5%
7.5%
5.3% 5.2%
44.8%
Smartphone Vendor Market
Share (Worldwide)
Samsung Apple Huawei
XiaoMi Lenovo
Also, Inari is focused on expanding its operations and this had led us to believe that its capacity and utilization rate would be able to complement the demand.
Valuations
Recommendation: Buy
Target Price: MYR 4.72
We have used a Forward PE Valuation Method in deriving our target share price for
Inari Amertron Berhad for the 12-months going forward and have thus based our valuation upon a few key assumptions that should be taken into consideration of.
PE Valuation Model
We have chosen this method in valuing Inari’s one-year target intrinsic share price as in our opinion and assumptions, we think that a PE Valuation would be suitable and realistic for the company given its high revenue and earnings growth rates.
The primary financial model [Appendix A] is forecasted for 2 years (FY2016 and
FY2017), given that Inari’s share prices reflects very much upon investors’ expectations and its rise in earnings, which are fundamental elements to the PER.
0%
50%
100%
150%
200%
250%
2012 2013 2014 2015 2016E 2017E
YoY Revenue Growth
Source: Company & Team Estimates
Source: