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Refer to important disclosures at the end of this report ed: SGC / sa: BC
BUYBUYBUYBUY (Initiating Coverage)
Last Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: RM3.38 KLCIKLCIKLCIKLCI : : : : 1,723.73 PricePricePricePrice Target :Target :Target :Target : RM4.20 (24% upside) Shariah Compliant:Shariah Compliant:Shariah Compliant:Shariah Compliant: Yes Reason for Report :Reason for Report :Reason for Report :Reason for Report : Initiating coverage Potential Catalyst:Potential Catalyst:Potential Catalyst:Potential Catalyst: More orders from Avago; plant expansion Analyst Woo Kim TOH +603 2604 3917 [email protected]
Price Relative
Forecasts and Valuation
FY FY FY FY JunJunJunJun ((((RMRMRMRM m) m) m) m) 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF
Turnover 794 935 1,116 1,287 EBITDA 135 186 236 284 Pre-tax Profit 107 154 199 242 Net Profit 99 147 188 227 Net Pft (Pre Ex.) 99 147 188 227 EPS (sen) 19.2 20.4 26.2 31.5 EPS Pre Ex. (sen) 19.2 20.4 26.2 31.5 EPS Gth (%) 103 6 28 21 EPS Gth Pre Ex (%) 103 6 28 21 Diluted EPS (sen) 15.6 18.8 23.9 28.7 Net DPS (sen) 6.8 8.2 10.5 12.6 BV Per Share (sen) 50.1 71.3 87.1 106.2 PE (X) 17.6 16.6 12.9 10.7 PE Pre Ex. (X) 17.6 16.6 12.9 10.7 P/Cash Flow (X) 43.0 14.1 13.4 10.8 EV/EBITDA (X) 12.7 11.8 9.1 7.3 Net Div Yield (%) 2.0 2.4 3.1 3.7 P/Book Value (X) 6.7 4.7 3.9 3.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 47.7 38.0 33.0 32.6 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 20.4 25.5 30.1 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 7 S: 1 H: 0 ICB IndustryICB IndustryICB IndustryICB Industry : Technology ICB Sector: ICB Sector: ICB Sector: ICB Sector: Technology Hardware & Equipment Principal Business:Principal Business:Principal Business:Principal Business: Inari is principally involved in back-end semiconductor packaging, which comprises back- end wafer processing, package assembly and RF final testing.
Source of all data: Company, AllianceDBS, Bloomberg Finance L.P.
At A Glance Issued Capital (m shrs) 728 Mkt. Cap (RMm/US$m) 2,459 / 638 Major Shareholders Insas Berhad (%) 27.8 EPF (%) 7.4 KWAP (%) 7.3 Free Float (%) 72.2 3m Avg. Daily Val (US$m) 2.3
Malaysia Equity Research
5 Aug 2015
Company Focus
Inari Amertron Bhd Bloomberg: INRI MK | Reuters: INAR.KL Refer to important disclosures at the end of this report
Proxy to Avago • Inari is a key supplier of OSAT services to Avago
• Beneficiary of multi-year growth in RF thanks to Avago’s lead in FBAR filters
• Significant capacity expansion (especially for RF) to drive 32% earnings CAGR over FY15-17F
• Initiate coverage: BUY, RM4.20 TP
Key supplier of outsourced assembly & test (OSAT)
services to Avago. Inari is principally involved in back-end
semiconductor packaging services, which mainly comprises
back-end wafer processing, package assembly, and radio
frequency (RF) final testing. The acquisition of Amertron in
June 2013 added optoelectronics and fibre-optic packaging
services to the group. US-listed Avago is a key customer which
contributes more than 70% of Inari’s revenues.
Riding on Avago’s lead in RF chips. Inari’s RF segment has
grown by leaps and bounds since Inari was listed in 2011. We
expect demand for Avago’s RF content in smartphones to
continue to grow rapidly in the medium term, underpinned by
three key drivers: 1) rising adoption of 4G LTE; 2) smartphone
variant consolidation; and 3) integration of RF modules.
Significant capacity expansion. To prepare for the
incremental RF volumes in the coming years, Inari has recently
doubled its Penang’s manufacturing floor space with the new
P13 plant. Overall, capacity for Inari’s RF segment will expand
by 30% by Sep 2015 and another 30% gradually by 2H2016.
They have plans to add another plant (+30% floor space
capacity), possibly within the next 12 months.
Initiate coverage: BUY, TP RM4.20. Our TP is based on 16x
fully-diluted CY16 EPS, which is at a premium to the sector
average given Inari’s growth potential. The stock deserves to
trade at a premium to peers given its close relationship with
Avago which has a strong lead in the fast-growing RF market.
The stock is currently trading at 16.6x/12.9x FY15F/16F PE and
0.4x PEG, implying 24% upside from current levels.
61
161
261
361
461
561
661
761
861
0.2
0.7
1.2
1.7
2.2
2.7
3.2
3.7
Aug-11 Aug-12 Aug-13 Aug-14 Aug-15
Relative IndexRM
Inari Amertron Bhd (LHS) Relative KLCI INDEX (RHS)
Page 2
Company Focus
Inari Amertron Bhd
INVESTMENT THESIS
Profile Rationale
Inari is principally involved in back-end semiconductor
packaging services, which comprises mainly back- end wafer
processing, package assembly, and RF final testing. US-listed
Avago is a key customer and contributes more than 70% of
Inari’s revenues.
Capacity expansion amid mCapacity expansion amid mCapacity expansion amid mCapacity expansion amid multiultiultiulti----yearyearyearyear growth in RFgrowth in RFgrowth in RFgrowth in RF
• We expect strong demand for Avago’s RF content in
smartphones in the medium term, underpinned by three
key drivers: 1) rising adoption of 4G LTE; 2) smartphone
variant consolidation; and 3) further integration of RF
modules.
• To prepare for the incremental RF volumes in the coming
years, Inari has recently doubled its Penang’s
manufacturing floor space with a new P13 plant.
Margin expansion Margin expansion Margin expansion Margin expansion
• Inari’s margins will rise going forward, driven by: 1) better
economies of scale from higher volumes; 2) cost-saving
initiatives at Amertron; 3) larger contribution from RF
segment; and 4) a stronger USD.
Opportunities for new product transfers from AvagoOpportunities for new product transfers from AvagoOpportunities for new product transfers from AvagoOpportunities for new product transfers from Avago
• New product transfers such as the recent chip fabrication
process for Avago fibre-optics division would help Inari to
diversify beyond the RF segment.
• Inari could potentially secure Broadcom as a customer if
the merger between Avago and Broadcom goes through.
Valuation Risks
We initiate coverage of Inari with a BUY recommendation
and RM4.20 TP. Our TP is based on 16x fully-diluted CY16
EPS, which is at a premium to the sector average given
Inari’s growth potential. The stock deserves to trade at a
premium to peers given its close relationship with Avago
which has a strong lead in the fast-growing RF market.
Single customer riskSingle customer riskSingle customer riskSingle customer risk
• The relationship between Avago and Inari is strong,
judging by the ongoing capacity expansion. This suggests
minimal risk of Inari losing sales or volumes to other
providers of OSAT services.
• Risk factors that could affect Avago’s RF sales (such as
introduction of a better technology by peers) are also risks
for Inari. Nevertheless, this risk is mitigated by continuous
high-level R&D spending by Avago to improve and
maintain the competitive edge of its FBAR filters.
SlowSlowSlowSlowerererer demand for smartphonedemand for smartphonedemand for smartphonedemand for smartphonessss
• A significant slowdown in demand for smartphones could
affect sales at the RF segment. However, the impact may
not be as severe because of rising RF content in
smartphones.
Forex risksForex risksForex risksForex risks
• Inari is exposed to forex risks because most of its sales are
denominated in USD, but only 50% of costs (mainly raw
material costs).
Source: AllianceDBS
Page 3
Company Focus
Inari Amertron Bhd
SWOT Analysis StrengthsStrengthsStrengthsStrengths WeaknessWeaknessWeaknessWeakness
• Inari has a strong relationship with Avago
• Experienced management team - members has been in the semiconductor industry for more than 20 years
• Capex is less-intensive as testing equipment (which is expensive and customer-specific) are consigned by Avago
• High dependency on Avago
• Smaller size vs Tier-1 players in the OSAT industry.
OpportunitiesOpportunitiesOpportunitiesOpportunities ThreatsThreatsThreatsThreats
• Expand capacity to meet strong growth of demand for Avago’s RF component.
• New product transfers (such as chip fabrication for CyOptics) would help Inari to diversify beyond the RF segment.
• Inari could secure Broadcom as a customer if the merger between Avago and Broadcom goes through.
• Emergence of better solutions that would make Avago’s FBAR filters obsolete.
• Slowing demand for smartphones
• Excess capacity in the OSAT industry, which would reduce pricing.
Source: AllianceDBS
Page 4
Company Focus
Inari Amertron Bhd
Company Background A A A A key OSAT provider for Avagokey OSAT provider for Avagokey OSAT provider for Avagokey OSAT provider for Avago.... Inari Amertron Bhd (Inari) is
principally involved in back-end semiconductor packaging
services, which comprises mainly back- end wafer processing,
package assembly, and RF final testing. Its key customer is US-
listed Avago Technologies (Avago), one of the top three RF
chipmakers in the world.
Started operation in 2006Started operation in 2006Started operation in 2006Started operation in 2006.... Inari commenced operations in
Penang in July 2006 and secured a 3-year manufacturing
contract from Avago later that year. Since then, this contract
had been renewed twice; in 2010 and 2013. The company was
listed in 2011.
Inari started off with only assembly services in the early days,
and was mainly involved with quad-flat no-leads (QFN)
packages, surface mount technology (SMT), as well as multi-
chip module (MCM) technology. In line with technological
changes and to meet Avago’s requirements, the company has
continuously improved its packaging solutions over the years by
adding fine-pitch, flip-chip, and copper pillar bump capabilities.
In 2007, Inari started offering back-end wafer processing
services to Avago. In 2008, it expanded into RF testing, which
completes the whole back-end services segment. As a result,
Inari became a one-stop semiconductor packaging services
provider for Avago. See Exhibit 1.
Exhibit 1: Inari’s semiconductor packaging and testing services
Source: Company
SetSetSetSet up Cup Cup Cup CEEDTecEEDTecEEDTecEEDTec and ISKand ISKand ISKand ISK in 2012in 2012in 2012in 2012.... In an effort to diversity its
business portfolio, Inari acquired 51%-stake in CEEDTec in 2012
for RM3.6m. CEEDTec is an original design manufacturer (ODM)
of electronic test and measurement equipment, and counts
Agilent as its key customer. In the same year, it set up Inari
South Keytech S/B (ISK) to venture into the manufacturing and
assembly of fibre-optic components.
Acquired Acquired Acquired Acquired Amertron in June 2013.Amertron in June 2013.Amertron in June 2013.Amertron in June 2013. In 2013, Inari completed the
acquisition of Amertron for about RM103m, funded by
proceeds from a rights issue, the issuance of preference shares,
and internally generated funds. Amertron’s core business is the
manufacturing of optoelectronics (see Exhibit 2). They operate
out of two plants in the Philippines and one in China. Besides
Avago, Osram is also a key customer of Amertron.
Exhibit 2: Amertron’s optoelectronics business
Source: Company
Page 5
Company Focus
Inari Amertron Bhd
Exhibit 3: Location of Inari’s manufacturing facilities
Source: Company
Experienced management teamExperienced management teamExperienced management teamExperienced management team.... Inari was founded by Ho Phon
Guan, Mai Mang Lee, and Tan Lee Pang in 2006, all of whom
have more than 20 years of experience in the semiconductor
and electronics manufacturing industry. Current CEO, Lau Kean
Cheong, also has more than 20 years of experience and has
helmed Inari since 2011. See Exhibit 4 for more details. Exhibit 4: Key Management Team
Name and DesignationName and DesignationName and DesignationName and Designation AgeAgeAgeAge ProfileProfileProfileProfile Lau Kean ChLau Kean ChLau Kean ChLau Kean Cheeeeongongongong Executive Director CEO
47 • Appointed CEO on July 2011 and Executive Director on October 2012.
• More than 20 years of experience in various firms such as Intel Penang, KESP and
Globetronics Technology.
• Diploma in Electronics Engineering from Tunku Abdul Rahman College, KL.
• MSc in Information Technology for Manufacture from University of Warwick, UK.
Dr. Tan Seng ChuanDr. Tan Seng ChuanDr. Tan Seng ChuanDr. Tan Seng Chuan Executive Vice Chairman
59 • Oversees Inari’s new business development and risk management.
• First Class Honours in Mechanical Engineering from Imperial College, UK.
• Masters and PhD in Engineering Science from Harvard University, USA.
Ho Phon GuanHo Phon GuanHo Phon GuanHo Phon Guan Executive Director
59 • In charge of Inari’s technology roadmap and customer relations.
• Bachelor of Science (Hons) in E&E Engineering from Thames Polytechnic, London.
• Masters of Science in Industrial Management from University of Birmingham, UK.
• MBA from University of Santa Clara, California.
Mai Mang LeeMai Mang LeeMai Mang LeeMai Mang Lee Executive Director
55 • In charge of Inari’s manufacturing facilities, equipment and government matters.
• Diploma in Mechanical Engineering from Institut Teknologi Butterworth, Penang.
• MS Eng, UK from Society of Engineers.
Source: Company
Page 6
Company Focus
Inari Amertron Bhd
RF – Multi-year growth drivers
Riding on AvagoRiding on AvagoRiding on AvagoRiding on Avago’s’s’s’s strong strong strong strong leadleadleadlead in RFin RFin RFin RF. . . . Inari’s RF segment has
grown by 4-year CAGR of 39% since listing in 2011 (see
Exhibit 5). We expect demand for Avago’s RF content in
smartphones to continue to grow rapidly in the medium
term, underpinned by three key drivers: 1) rising adoption of
4G LTE; 2) smartphone variant consolidation; and 3) further
integration of RF modules. We examine these growth drivers
in detail below.
Apart from Inari, other key OSAT providers to Avago are
Advanced Semiconductor Engineering and Foxconn.
Exhibit 5: Inari’s RF division revenue (in RM m)
Sources: Company, AllianceDBS
Rising adoption of Rising adoption of Rising adoption of Rising adoption of 4G 4G 4G 4G LTELTELTELTE. Based on industry forecasts by
GSMA Intelligence, global 4G LTE connections are expected
to grow at a CAGR of more than 30% from 2014 to 2020
(see Exhibit 6). We expect rapid adoption of 4G LTE especially
in China to drive the growth of Avago’s RF division.
Avago is the dominant supplier of high-band frequency (>2.0
GHz) RF products because of superior performance of its film
bulk acoustic resonator (FBAR) filters. Compared to other
filters, Avago’s FBAR filters are better in solving the problem
of spectrum congestion, where gaps between different
frequency bands are very narrow (which is common in the
high frequency band).
As demand continues to outstrip supply, we understand
Avago’s current FBAR production is on allocation basis only to
their main customers. To resolve this, Avago is doubling its
FBAR filters capacity, likely to be completed by mid-2016. By
then, we expect Avago will be able to fulfil additional
demand from other major smartphone manufacturers,
particularly from China.
To prepare for the incremental RF volume from Avago in the
coming years, Inari has recently expanded its manufacturing
capacity with a new P13 plant. Further plant expansion has
also been identified and could materialise within the next 12
months.
Exhibit 6: Rising LTE subscriptions (in billions)
Sources: Qorvo, GSMA
LTE phonesLTE phonesLTE phonesLTE phones have higher RF contenthave higher RF contenthave higher RF contenthave higher RF content. Compared to only 2-5
frequency bands for 2G and 3G, there are more than 25
different LTE frequency bands globally. Hence, the RF content
in LTE phones are easily 3-5x times more than in a typical 3G
phone (see Exhibit 7), as each frequency band will require
additional RF chips to support them. Most of the smartphone
manufacturers such as Apple and Samsung have started to
support LTE frequency since 2012.
Exhibit 7: Higher RF content in LTE phones
Sources: Qorvo
120
181233
309
448
578
697
0
200
400
600
800
2011 2012 2013 2014 2015F 2016F 2017F
Page 7
Company Focus
Inari Amertron Bhd
Consolidation of smartphone Consolidation of smartphone Consolidation of smartphone Consolidation of smartphone variantvariantvariantvariant.... Different geographies
and different carriers operate at different frequency bands. As
such, smartphone manufacturers used to design various
variants of the same smartphone model to suit different
carriers or geographies. In the context of RF, this means
relatively fewer chips per smartphone to support only the
necessary frequency bands.
To reduce the complexity in supply chain procurement and
inventory management, smartphone manufacturers now
prefer to have fewer variants with each variant capable of
supporting multiple frequency bands. Apple is clearly at the
forefront of this, consolidating its smartphone variants to 3
with the iPhone 6/6+ but increasing the number of LTE band
supported to 16-20 bands. Its previous model, iPhone 5S/5C
has 5 variants supporting only 7-13 LTE bands each. See
Exhibit 8.
Exhibit 8: iPhone variants and LTE band support
No. of variantsNo. of variantsNo. of variantsNo. of variants No. No. No. No. LTE band LTE band LTE band LTE band supportsupportsupportsupportedededed
iPhone 5iPhone 5iPhone 5iPhone 5 3 2-5
iPhone 5S/5CiPhone 5S/5CiPhone 5S/5CiPhone 5S/5C 5 7-13
iPhone 6/6 PlusiPhone 6/6 PlusiPhone 6/6 PlusiPhone 6/6 Plus 3 16-20
Sources: Apple’s website
In our view, further variant consolidation by Apple seems
unlikely, but the smartphone manufacturer could add support
for a few more LTE bands in the future. On the other hand,
we think consolidation is more likely for Samsung whose
flagship models (Galaxy S6 and Note 4) have around 9-10
variants and only support 9-13 LTE bands currently. We
expect the consolidation trend to pick up pace at Samsung
and drive Avago’s RF content growth over the next 1-2 years.
IIIIntegration of RF ntegration of RF ntegration of RF ntegration of RF componentscomponentscomponentscomponents. The number of RF components
in smartphones increase in tandem with the number of
bands. As such, integration (as opposed to discrete
architecture) has always been the way forward in RF design in
order to save board space, improve battery life, and reduce
time-to-market. For Avago, integration is good because it can
leverage on its dominance in FBAR filters to gain market share
in other RF components.
The building blocks of RF chips are antenna switch, duplexer
(filter), and power amplifier. Based on various smartphone
teardown analyses by iFixit and Chipworks, it can be observed
that Apple has largely transitioned to the power amplifier +
duplexer (PAD) architecture, while Samsung is progressively
moving towards this direction. On the other hand, most
Chinese smartphone OEMs are still relying on discrete
architecture, though they would likely adopt PAD architecture
once they begin to support more global frequency bands over
the next 1-2 years.
Exhibit 9: Simplified RF Architecture of Apple iPhone 6, Antenna Switch Module (ASM) and PAD
Sources: Navian, AllianceDBS
Towards PAMiD Towards PAMiD Towards PAMiD Towards PAMiD architecturearchitecturearchitecturearchitecture. The next step in integration
would be a fully-integrated RF module for each frequency
range, commonly referred to as PAMiD (power amplifier
module in duplexer) architecture. A shift towards PAMiD
(basically PAD integrated with an antenna switch) essentially
means Avago is gaining switch content (where it has little
market share) given that the company will remain the
preferred supplier for high-band RF components. According
to Navian (a marketing research and consulting firm for the
electronics industry), PAMiD architecture could start to
emerge in 2016 smartphone models, with Apple iPhone
among the early adopters.
Exhibit 10: PAMiD architecture
Sources: Navian, AllianceDBS
Page 8
Company Focus
Inari Amertron Bhd
Growth Strategies CCCCompleted P13ompleted P13ompleted P13ompleted P13 plant expansionplant expansionplant expansionplant expansion. . . . Inari has recently completed
its new P13 plant expansion plan (166k sqft), which doubles
its manufacturing floor space in Penang. Plant P13 is a
refurbished 2-storey factory building on a 5.5-acre land which
the company bought in Aug 2014 for about RM26m. Since
2Q15, Inari has gradually installed new equipment and
started initial production at this facility. Management expects
to reach full production run by September.
To cater to the higher volume from Avago, two-thirds of the
first floor manufacturing space is used to house the new RF
production capacity. The remaining one third of the floor
space is allocated for chip fabrication and wafer-sorting
services of new products, i.e. photonics IC chips for Avago’s
fibre-optics division.
Second floor of P13 plant houses the RF testing equipment.
Inari will add approximately 170 testers initially (+30%
capacity), which would increase its testing capacity to close to
700 units by September. It will add another 160-180 units of
testers gradually towards 2H16.
Exhibit 11: Inari’s P13 plant
Sources: Company
Still have land for future expansionStill have land for future expansionStill have land for future expansionStill have land for future expansion. . . . There is still sufficient
space within Plant P13 5.5-acre land that could be utilised for
future expansion. We understand Inari is currently evaluating
plans to construct a new factory building that could
potentially add another 100k sq ft to Plant P13’s floor space
in 2016.
Other than that, Inari still has a 5-acre land in Batu Kawan
(see Exhibit 12) that was acquired in Aug 2014 for RM8m
cash. And because this land is located away from its existing
plants, we understand Inari is keen to secure other customers
for the Batu Kawan land, which could include Osram or even
Broadcom once the USD37bn acquisition by Avago is
completed in the future. Opportunities exist for Inari because
Broadcom is a fabless semiconductor company i.e. it only
focuses on chips design and development, while the
manufacturing process is outsourced to foundries and OSAT.
Exhibit 12: Location of Inari’s Batu Kawan land
Sources: Company
CostCostCostCost----saving initiatives andsaving initiatives andsaving initiatives andsaving initiatives and new expansionnew expansionnew expansionnew expansion at Ameat Ameat Ameat Amerrrrtrontrontrontron.... The
industry for Amertron’s opto-electronics business is relatively
matured. Hence, management has been focusing on cost-
saving initiatives since acquiring Amertron in 2013. Though
still shy of its 10% target, net margins at Amertron have
improved to 6-7% (from 3-4% when it was acquired), thanks
to better cost control and savings from group raw material
procurement.
Amertron is currently expanding its existing Clark Field factory
by 90k sq ft (CK-2) with targeted completion by 2H16. The
new capacity is likely to be used to produce fibre-optics and
sensor components.
Exhibit 13: Amertron factory (expansion) in Clark Field
Sources: Company
Page 9
Company Focus
Inari Amertron Bhd
Financial Highlights
Exhibit 14: Inari’s annual net profit (in RM m)
Sources: Company, AllianceDBS
EEEEarnings growth arnings growth arnings growth arnings growth to remain strong to remain strong to remain strong to remain strong in FY15in FY15in FY15in FY15----17171717F.F.F.F. We expect
Inari to achieve strong earnings growth of 23-48% in FY15-
16F, underpinned by the RF division which is expanding
capacity rapidly to meet robust demand for Avago’s RF chips.
Meanwhile, we forecast relatively stable annual growth for
Amertron, except in FY17 when growth would be higher with
the completion of the capacity expansion at Clark Field
factory. For ISK and CEEDTec, we assumed relatively stable
growth for now.
Exhibit 15: Revenue breakdown, by segment (in RM m)
Sources: Company, AllianceDBS
Significant capacity expansion for RF segmentSignificant capacity expansion for RF segmentSignificant capacity expansion for RF segmentSignificant capacity expansion for RF segment. . . . Following the
P13 plant expansion, we expect Inari’s RF segment to
continue to achieve double-digit revenue growth of 23-37%
in FY15-17F, underpinned by strong demand for RF
components. Based on the number of testers, overall capacity
at the RF segment will expand by about 30% by September
(from 522 to >700 units), and another 30% progressively
towards 2H16.
.
With the significant capacity expansion, we also expect overall
utilisation rate at the RF segment to drop slightly to 80% in
FY16-17F (from 85-90% in previous years) as incremental
wafer volume from Avago is likely to come in on a staggered
basis. And given better economies of scale, ASP cost-down
should be higher in FY16-17F as Inari passes on some of the
cost-savings to Avago.
Exhibit 16: No. of testers at Inari’s RF segment (units)
Sources: Company, AllianceDBS
Stable growth Stable growth Stable growth Stable growth atatatat AmertronAmertronAmertronAmertron. . . . We expect Amertron’s growth to
be relatively stable at 5-6% in FY15-16F, but pick up to 10%
in FY17F when the 90k sq ft expansion at Clark Field factory
is completed.
BetterBetterBetterBetter margins. margins. margins. margins. After consolidating Amertron in FY14, Inari’s
overall net margins fell to 12.5% because of lower
profitability at Amertron. We expect margins to expand to
15.7-17.6% in FY15-17F, underpinned by: 1) better
economies of scale from higher volume; 2) cost-saving
initiatives at Amertron; 3) larger contribution from RF
segment; and 4) a stronger USD.
Exhibit 17: Inari’s net margins (%)
Sources: Company, AllianceDBS
18.8 19.9
42.0
99.2
146.6
188.0
226.7
0
50
100
150
200
250
2011 2012 2013 2014 2015F 2016F 2017F
0
200
400
600
800
1,000
1,200
1,400
2014 2015F 2016F 2017F
RF Amertron ISK & CEEDTec
180
270 326
422
522
800
880
-
200
400
600
800
1,000
2011 2012 2013 2014 2015F 2016F 2017F
15.7%
11.0%
17.4%
12.5%
15.7%
16.8%17.6%
8%
10%
12%
14%
16%
18%
20%
2011 2012 2013 2014 2015F 2016F 2017F
Page 10
Company Focus
Inari Amertron Bhd
Effective tax rate to remain low. Effective tax rate to remain low. Effective tax rate to remain low. Effective tax rate to remain low. Inari’s effective tax rate has
been low because it has secured pioneer status (tax
exemption) for the RF division. We assume effective tax rate
will remain low at 4-6% in FY15-FY17F as the tax incentive
will only expire on 30 Mar 2017. Beyond FY17, there is a fair
chance that Inari could renew its tax incentive because of
further integration of its RF module into PAMiD architecture,
which will be more advanced.
Strong balance sheet with nStrong balance sheet with nStrong balance sheet with nStrong balance sheet with net cash positionet cash positionet cash positionet cash position. . . . Despite rapid
expansion over the years, Inari has been able to maintain a
net cash position because of cash proceeds from warrant
conversion and two rights issues. As at 31 March 2015, the
company had RM198m net cash.
Dividend policy. Dividend policy. Dividend policy. Dividend policy. Inari has a 40% dividend payout policy,
which the company has met or beat in the past few years.
We assume 40% payout in FY15-17F, translating into net
dividend yield of 2.4-3.7% for Inari.
Valuation Initiate coverage: BUY, Initiate coverage: BUY, Initiate coverage: BUY, Initiate coverage: BUY, RM4.20RM4.20RM4.20RM4.20 TPTPTPTP. . . . We initiate coverage on
Inari with a BUY recommendation and RM4.20 TP. Our TP is
based on 16x fully-diluted CY16 EPS, which is at a premium
to the sector average given Inari’s growth potential. The stock
deserves to trade at a premium to peers given its close
relationship with Avago, which has a strong lead in the fast-
growing RF market segment. The stock is currently trading at
16.6x/12.9x FY15F/16F PE and 0.4x PEG, implying 24%
upside from current levels.
Key Risks SSSSingle ingle ingle ingle customer riskcustomer riskcustomer riskcustomer risk.... Avago is a major customer and
contributes more than 70% of Inari’s revenue. To a certain
extent, Inari’s fortunes are tied to Avago’s success, especially
the RF segment. Hence, any key risks to Avago’s RF sales
(such as better technology by peers) are also risks for Inari.
Nevertheless, this risk is mitigated by continuous high-level
R&D spending by Avago to improve and maintain the
competitive edge of its FBAR filters.
The relationship between Avago and Inari is strong, judging
by the ongoing capacity expansion. Hence, there is little risk
of Inari losing sales or volume to other OSAT providers.
SlowSlowSlowSlowerererer smartphone demandsmartphone demandsmartphone demandsmartphone demand.... A significant slowdown in
demand for smartphones could affect sales at the RF
segment. However, the impact may not be as severe because
of rising RF content in smartphones.
Forex risk.Forex risk.Forex risk.Forex risk. Inari is exposed to forex risks because most of its
sales are denominated in USD, but only 50% of costs (mainly
raw material costs). The company does not hedge its forex
exposure.
EXHIBIT 18: Malaysian peer comparison (as at 4 Aug 2015)
Sources: AllianceDBS, Bloomberg Finance L.P
CallTarget
Price
Current
Price
Market Cap
(USD)CY2015 CY2016 CY2015 CY2016 CY2015 CY2016 CY2015 CY2016 CY2015 CY2016
Inari Amertron Buy 4.20 3.38 637.5 15.8x 12.8x 24% 23% 2.8% 3.4% 4.3x 3.5x 35% 33%
Globetronics Technology Buy 7.50 6.07 443.0 20.9x 14.5x 26% 44% 4.1% 5.4% 5.7x 5.3x 28% 38%
Unisem Buy 2.80 2.14 395.3 15.4x 12.2x 54% 26% 4.7% 5.6% 1.3x 1.2x 10% 10%
JCY International NR NR 0.74 393.0 9.2x 8.6x 17% 7% 5.9% 6.5% 1.2x 1.2x 17% 15%
Malaysian Pacific industries Buy 7.55 7.00 360.9 10.8x 9.5x 57% 14% 2.9% 2.9% 1.6x 1.4x 15% 16%
Vitrox Corporation NR NR 3.43 207.8 14.0x 12.3x 16% 13% 1.9% 2.1% 3.6x 3.0x 26% 25%
Uchi technologies NR NR 1.54 150.2 11.8x 11.8x 20% 0% 7.1% 7.5% 2.8x 2.7x 24% 24%
Average 14.5x 11.8x 32% 21% 4.0% 4.6% 3.1x 2.7x 23% 24%
ROAEP/E (FD)EPS (FD) Growth
(YoY)Dividend Yield Price/ BVPS
Page 11
Company Focus
Inari Amertron Bhd
Exhibit 18: Inari forward PE band (x)
Sources: Company, AllianceDBS
Key Assumptions
FY FY FY FY JunJunJunJun 2012201220122012AAAA 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF
No. of testers (RF division) 270 326 422 522 800 880
Utilisation rate (%) 85.0 85.0 85.0 90.0 80.0 85.0
Amertron (y-o-y growth) - - - 5.0 6.0 10.0
RM vs. USD 3.09 3.08 3.24 3.45 3.60 3.60
Segmental Breakdown
FY FY FY FY JunJunJunJun 2012201220122012AAAA 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF Revenues (RM m)
Inari RF 181 233 309 448 578 697
Amertron & Others 0 8 485 487 538 590
TotalTotalTotalTotal 181181181181 241241241241 794794794794 935935935935 1,1161,1161,1161,116 1,2871,2871,2871,287
Source: Company, AllianceDBS
Avg: 7.2x
+1sd: 11.6x
+2sd: 16.1x
-1sd: 2.7x
-1.6
0.4
2.4
4.4
6.4
8.4
10.4
12.4
14.4
16.4
Aug-11 Aug-12 Aug-13 Aug-14 Aug-15
(x)
Lower utilisation rate due to significant capacity expansion
Strong growth of RF segment
Page 12
Company Focus
Inari Amertron Bhd
Income Statement (RM m)
FY FY FY FY JunJunJunJun 2012201220122012AAAA 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF
Revenue 181 241 794 935 1,116 1,287
Cost of Goods Sold (145) (175) (635) (713) (836) (958)
Gross ProfitGross ProfitGross ProfitGross Profit 36363636 66666666 158158158158 222222222222 280280280280 329329329329
Other Opng (Exp)/Inc (15) (22) (46) (65) (78) (84)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 21212121 45454545 112112112112 157157157157 202202202202 245245245245
Other Non Opg (Exp)/Inc 0 0 0 0 0 0
Associates & JV Inc 0 0 0 0 0 0
Net Interest (Exp)/Inc (1) (1) (5) (3) (3) (3)
Exceptional Gain/(Loss) 0 0 0 0 0 0
PrePrePrePre----tax Profittax Profittax Profittax Profit 20202020 43434343 107107107107 154154154154 199199199199 242242242242
Tax (1) (2) (7) (6) (10) (15)
Minority Interest 1 1 (1) (1) (1) (1)
Preference Dividend 0 0 0 0 0 0
Net ProfitNet ProfitNet ProfitNet Profit 20202020 42424242 99999999 147147147147 188188188188 227227227227
Net Profit before Except. 20 42 99 147 188 227
EBITDA 34 59 135 186 236 284
Growth
Revenue Gth (%) 51.1 33.4 229.1 17.8 19.4 15.3
EBITDA Gth (%) 9.4 72.2 128.0 37.3 27.2 20.3
Opg Profit Gth (%) (2.1) 113.4 152.3 39.4 28.9 21.5
Net Profit Gth (%) 6.0 111.3 136.2 47.7 28.3 20.6
Margins & Ratio
Gross Margins (%) 19.9 27.5 20.0 23.8 25.1 25.6
Opg Profit Margin (%) 11.5 18.5 14.2 16.8 18.1 19.1
Net Profit Margin (%) 11.0 17.4 12.5 15.7 16.8 17.6
ROAE (%) 31.0 35.0 47.7 38.0 33.0 32.6
ROA (%) 15.9 16.1 22.8 23.3 22.8 23.7
ROCE (%) 26.5 25.3 35.0 30.7 28.4 28.8
Div Payout Ratio (%) 46.7 47.4 35.4 40.0 40.0 40.0
Net Interest Cover (x) 36.9 35.6 20.6 57.0 73.4 89.2
Source: Company, AllianceDBS
Margins Trend
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
19.0%
20.0%
21.0%
2013A 2014A 2015F 2016F 2017F
Operating Margin % Net Income Margin %
Improving margins
Page 13
Company Focus
Inari Amertron Bhd
Balance Sheet (RM m)
FY FY FY FY JunJunJunJun 2012201220122012AAAA 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF Net Fixed Assets 55 112 130 156 181 202
Invts in Associates & JVs 0 0 0 0 0 0
Other LT Assets 6 11 16 16 16 16
Cash & ST Invts 41 45 77 300 346 420
Inventory 22 108 138 134 159 184
Debtors 19 85 123 142 169 195
Other Current Assets 5 11 14 14 14 14
Total AssetsTotal AssetsTotal AssetsTotal Assets 149149149149 372372372372 497497497497 760760760760 885885885885 1,0311,0311,0311,031
ST Debt
5 20 36 36 36 36
Creditor 7 51 60 130 141 149
Other Current Liab 45 82 73 13 13 13
LT Debt 8 10 19 19 19 19
Other LT Liabilities 1 51 50 50 50 50
Shareholder’s Equity 83 157 259 512 626 763
Minority Interests 0 0 0 0 0 0
Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 149149149149 372372372372 497497497497 760760760760 885885885885 1,0311,0311,0311,031
Non-Cash Wkg. Capital (5) 71 142 146 189 231
Net Cash/(Debt) 28 14 22 245 291 365
Debtors Turn (avg days) 40.1 78.7 47.9 51.7 50.8 51.6
Creditors Turn (avg days) 27.9 66.4 33.2 50.6 61.5 57.5
Inventory Turn (avg days) 56.0 148.9 73.3 72.4 66.7 68.2
Asset Turnover (x) 1.4 0.9 1.8 1.5 1.4 1.3
Current Ratio (x) 1.5 1.6 2.1 3.3 3.6 4.1
Quick Ratio (x) 1.1 0.8 1.2 2.5 2.7 3.1
Net Debt/Equity (X) CASH CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH CASH
Capex to Debt (%) 162.1 142.1 80.7 100.0 109.1 109.1
Source: Company, AllianceDBS
Asset Breakdown
Net cash position
Page 14
Company Focus
Inari Amertron Bhd
Cash Flow Statement (RM m)
FY FY FY FY JunJunJunJun 2012201220122012AAAA 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF
Pre-Tax Profit 20 43 107 154 199 242
Dep. & Amort. 14 15 23 29 34 39
Tax Paid (2) (3) (5) (6) (10) (15)
Assoc. & JV Inc/(loss) 0 0 0 0 0 0
Chg in Wkg.Cap. (13) 13 (94) (5) (42) (42)
Other Operating CF (1) 2 10 0 0 0
Net Operating CFNet Operating CFNet Operating CFNet Operating CF 18181818 71717171 41414141 172172172172 181181181181 225225225225
Capital Exp.(net) (21) (44) (44) (55) (60) (60)
Other Invts.(net) 0 0 0 0 0 0
Invts in Assoc. & JV 2 (86) 0 0 0 0
Div from Assoc & JV 0 0 0 0 0 0
Other Investing CF 0 0 0 0 0 0
Net Investing CFNet Investing CFNet Investing CFNet Investing CF (19)(19)(19)(19) (130)(130)(130)(130) (44)(44)(44)(44) (55)(55)(55)(55) (60)(60)(60)(60) (60)(60)(60)(60)
Div Paid (10) (17) (19) (59) (75) (91)
Chg in Gross Debt 8 11 15 0 0 0
Capital Issues 31 32 29 165 0 0
Other Financing CF (3) 35 10 0 0 0
Net Financing CFNet Financing CFNet Financing CFNet Financing CF 25252525 61616161 35353535 106106106106 (75)(75)(75)(75) (91)(91)(91)(91)
Currency Adjustments 0 0 1 0 0 0
Chg in Cash 25 2 32 223 46 74
Opg CFPS (sen) 9.4 12.9 26.2 24.6 31.1 37.1
Free CFPS (sen) (0.8) 6.1 (0.7) 16.3 16.8 22.9
Source: Company, AllianceDBS
Capital Expenditure
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
2013A 2014A 2015F 2016F 2017F
Capital Expenditure (-)
RM
Rights issue and warrant conversion
Page 15
Company Focus
Inari Amertron Bhd
Quarterly / Interim Income Statement (RM m)
FY FY FY FY JunJunJunJun 2Q2Q2Q2Q2014201420142014 3Q3Q3Q3Q2014201420142014 4Q4Q4Q4Q2014201420142014 1Q1Q1Q1Q2015201520152015 2Q2Q2Q2Q2015201520152015 3Q3Q3Q3Q2015201520152015
Revenue 187 192 224 222 228 228
Cost of Goods Sold (149) (151) (172) (178) (178) (181)
Gross ProfitGross ProfitGross ProfitGross Profit 37373737 41414141 52525252 43434343 49494949 48484848
Other Oper. (Exp)/Inc (9) (13) (19) (8) (8) (8)
Operating ProfitOperating ProfitOperating ProfitOperating Profit 28282828 28282828 33333333 35353535 42424242 39393939
Other Non Opg (Exp)/Inc 0 0 0 0 0 0
Associates & JV Inc 0 0 0 0 0 0
Net Interest (Exp)/Inc (1) (1) (2) (1) (2) (1)
Exceptional Gain/(Loss) 0 0 0 0 0 0
PrePrePrePre----tax Profittax Profittax Profittax Profit 27272727 27272727 31313131 34343434 40404040 38383838
Tax (1) (2) 0 0 (1) (1)
Minority Interest (1) (1) 0 0 1 1
Net ProfitNet ProfitNet ProfitNet Profit 24242424 25252525 31313131 34343434 40404040 38383838
Net profit bef Except. 24 25 31 34 40 38
EBITDA 33 34 40 42 50 48
Growth
Revenue Gth (%) (2.5) 2.8 16.7 (0.9) 2.7 0.2
EBITDA Gth (%) 17.2 3.0 17.1 4.7 18.2 (3.4)
Opg Profit Gth (%) 21.6 0.8 18.2 4.8 19.4 (5.6)
Net Profit Gth (%) 16.1 2.2 23.5 9.4 19.5 (5.6)
Margins
Gross Margins (%) 20.0 21.3 23.2 19.6 21.7 20.9
Opg Profit Margins (%) 15.0 14.7 14.9 15.8 18.3 17.3
Net Profit Margins (%) 13.1 13.0 13.8 15.2 17.7 16.7
Source: Company, AllianceDBS
Margins Trend
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1Q2014
2Q2014
3Q2014
4Q2014
1Q2015
2Q2015
3Q2015
Operating Margin % Net Income Margin %
Revenue growth was flat q-o-q due to maximum wafer capacity
Page 16
Company Focus
Inari Amertron Bhd
DISCLOSURE
Stock rating definitions STRONG BUY - > 20% total return over the next 3 months, with identifiable share price catalysts within this time frame BUY - > 15% total return over the next 12 months for small caps, >10% for large caps HOLD - -10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps FULLY VALUED - negative total return > -10% over the next 12 months SELL - negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame Commonly used abbreviations Adex = advertising expenditure EPS = earnings per share PBT = profit before tax bn = billion EV = enterprise value P/B = price / book ratio BV = book value FCF = free cash flow P/E = price / earnings ratio CF = cash flow FV = fair value PEG = P/E ratio to growth ratio CAGR = compounded annual growth rate FY = financial year q-o-q = quarter-on-quarter Capex = capital expenditure m = million RM = Ringgit CY = calendar year M-o-m = month-on-month ROA = return on assets Div yld = dividend yield NAV = net assets value ROE = return on equity DCF = discounted cash flow NM = not meaningful TP = target price DDM = dividend discount model NTA = net tangible assets trn = trillion DPS = dividend per share NR = not rated WACC = weighted average cost of capital EBIT = earnings before interest & tax p.a. = per annum y-o-y = year-on-year EBITDA = EBIT before depreciation and amortisation PAT = profit after tax YTD = year-to-date
Page 17
Company Focus
Inari Amertron Bhd
DISCLAIMER
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