Inari Amertron (INRI MK; BUY; cum-rights TP: MYR4.20): The best is yet to come

Initiation: Inari Amertron (INRI MK; BUY; cum-rights TP: MYR4.20): The best is yet to come

• What's New? FY6/14 core net profit tracked our/consensus expectations. 4QFY6/14 net profit of MYR31m (+24 QoQ, +135% YoY) took FY6/14 earnings to MYR101m (+141% YoY), making up 97%/102% of our/consensus full-year forecasts.

Inari has recorded an unbroken streak of net profit growth for the last 10 quarters and we believe that earnings will continue to gain traction going forward. On a QoQ basis, 4QFY6/14 core net profit grew 24% as (i) operating margin expanded 0.2ppts on the back of a 17% growth in revenue and (ii) lower taxes.   

Inari declared an interim dividend of 1.8sen bringing total DPS for FY6/14 to 6.8sen, representing a 29% payout. Subsequently, Inari also announced the acquisition of a 166k sq ft factory on 5.5-acre of leasehold land for MYR26m, to be funded internally.

• What’s our view? Our forecasts remain unchanged pending an analyst briefing today, with upside potential due to the acquisition of a new factory. We see huge potential for the new factory which is bigger than four of Inari’s existing plants in Penang combined. Historically, Inari has been able to get its factories up and running within 3-6 months. Bigger capacity is essential to support Avago’s higher requirements in lieu of imminent launches by prominent smart devices makers.

• Better results ahead. We expect Inari to report better results begining 1QFY6/15 as:

I.          Its RF division ramps up production for Avago in lieu of prominent new smart device launches in the next 6 months,

II.         51%-owned Ceedtec converts its design prototypes to mass production for Agilent,

III.        More meaningful contribution from wholly-owned ISK comes in as production for fiber-optics components goes live and full scale,

IV.        Margins improve in Ametron’s operations on the back of better economies of scale and cost efficiencies.

·         Risk/reward ratio is compelling and valuations are undemanding (13x CY15 FD PER and 0.5x PEG) for a growth stock with upside potential. Reiterate BUY.