Inari Amertron (INRI MK; BUY; TP: MYR4.10) - Discovery of a new gold mine?

We have a post briefing note on Inari and results notes on MBM and Pecca today.

Inari Amertron (INRI MK; BUY; TP: MYR4.10) - Discovery of a new gold mine?

• Conservative lift in our earnings forecasts. We are excited over Inari’s entry into the fast growing infrared LED segment whose applications include iris recognition. Post yesterday’s analyst briefing, our FY17-19 earnings forecasts are raised by 8%-11%, having rejigged our USD/MYR estimates (now 4.15 for FY17 and 4.05 for FY18/19) and revenue contribution from each division. Further upside could emerge on (i) faster adoption of iris scanners by smartphone players and/or (ii) sustained USD/MYR forex at above 4.40. Reiterate BUY with higher TP of MYR4.10 (+8%) on unchanged 17.5x CY17 EPS.
• Still not too late for entry. Trading at 14x CY17 PER currently (13x ex-cash; end-Sep 2016 net cash of MYR235m), Inari offers a decent 21% upside to our TP, backed by 3% yields - inexpensive for a growth stock with a 19% 3-year earnings CAGR with further upside potential. Also, with the announcement of the 1-for-1 bonus issue, we believe that sentiment for this stock will be further enhanced.

MBM Resources (MBM MK; BUY; TP: MYR3.00): 3Q17 missed expectations

• Stronger recovery if not for supply chain disruption. A fire incident at a major insulation part vendor’s plant capped MBM’s earnings recovery in 3Q16 as the supply chain disruption snowballed to Perodua and other auto parts vendors including MBM. As such, we cut our FY16 earnings forecast by 8%, having reduced (i) Perodua’s FY16 vehicle sales to 215k units (from 225k units) and (ii) contribution from its auto parts JV. Our FY17/18 earnings forecast are unchanged. MBM is still on track for recovery in FY17, riding on Perodua’s success. Maintain BUY with unchanged MYR3.00 TP, pegged at 10x FY17 EPS.
• Better results ahead. With the supply chain disruption out of the way, Perodua’s Oct production number jumped 35% MoM to 22.8k units (above 9M16 monthly average of 16.4k units) in order to meet the demand backlog for the Bezza model. Strong production will also benefit MBM’s auto parts manufacturing (alloy wheels) which is still operating below optimum level for now. Together, these factors establish our expectation for MBM’s earnings recovery in 2017.

PECCA Group (PECCA MK; BUY; TP: MYR1.95) - 1QFY17 below expectations

• Valuations still undemanding. With softer overall car production by its major customers (i.e. Toyota & Nissan), Pecca’s 1QFY6/17 core earnings fell to MYR4.4m (-8% QoQ), making up only 17% of our initial full-year forecasts. Nevertheless, vehicle production of the major marques has recovered strongly since Oct 2016, while potential corporate developments could provide upside to earnings, Meanwhile, valuations are still undemanding and we maintain BUY with a lower TP of MYR1.95, pegged to an unchanged 14.5x CY17 PER.
• Still banking on new forays to perform. We remain positive on Pecca for its exposure to Perodua whose sales volumes are expected to grow stronger with the Bezza and upcoming D20N model. Meanwhile, any contribution from Pecca’s entry into the (i) Thailand automotive market as well as (ii) aviation industry would offer a boost to our earnings forecasts, which have yet to incorporate any contribution from these two new segments.