Preview/Plant visit: Inari Amertron (INRI MK; BUY; TP: MYR4.05), Update (Bonus Issue): Berjaya Auto (BAUTO MK; BUY; TP: MYR5.00)

We have results preview/plant visit note on Inari and update on Berjaya Auto following its bonus issue announcement yesterday.

Inari Amertron (INRI MK; BUY; TP: MYR4.05): Small speed bump

• What's New? Inari’s 9MFY6/15 results, due out on 14 May, are likely to fall short, at MYR112m-115m net profit (+55-59% YoY; 69%-71% of our initial FY15 forecast), impacted by start-up costs of its new plant, P13. Also, Inari saw no increase in orders in 3QFY6/15 as Avago (AVGO US, Not Rated) was facing a wafer supply constraint despite strong demand. We understand that this constraint will gradually ease as Avago has invested in wafer fab capacity expansion which will lead to a gradual increase in production this year.

Our recent visit to P13 saw a small scale RF production with ~120 testers already in place as at end-Apr, taking the total to ~650 units for the Penang operations. Inari guided that P13 is able to house up to ~300 testers without changing the layout of the plant.

• What’s our view? We lower FY15 plant utilisation expectation to 80% from 85% due to the shortage of wafers from Avago. For FY16/17, we raise the number of testers by 150 units to 822 units, maximising P13’s space, but with lower overall plant utilisation of 80%/85% vs 90%/95% previously. Correspondingly, our FY15/16/17 net profit forecasts are adjusted by –5%/+1%/+3% respectively. As wafer constraint gradually eases with Avago’s new wafer fab capacity, we also expect Inari’s P13 to ramp up its production and we project stronger 4QFY6/15 net profit of MYR40m-MYR43m.
• Recent share price retracement of 11% offers buy in opportunities. Inari is a beneficiary of the USD’s strength, since it is a net USD exporter with 90%/70% of its revenue/COGS in USD. Our sensitivity analysis suggests that for every 1% change in our base MYR/USD rate of MYR3.45/USD1, there will be a 2.3% change to earnings on a full year basis. Inari’s share price has retraced by 11% from its high of MYR3.52 to MYR3.15 currently, in tandem with the recent strengthening of the MYR against the USD – by 5% from a high of MYR3.74/USD1 to MYR3.56/USD1. The current forex level is still however, above our base assumption of MYR3.45/USD1.
• Inexpensive valuation. Inari’s current valuation remains inexpensive with the stock trading at 14x CY15 PER vs local semiconductor peers at 16x CY15 PER. Our revised TP of MYR4.05 (+3%) pegs earnings to an unchanged CY16 PER of 16x, offering a 28% upside to its current price.

Berjaya Auto (BAUTO MK; BUY; TP: MYR5.00): Proposes 2-for-5 bonus issue

• What’s New? BAuto has proposed a 2-for-5 bonus shares issue of up to 326m new BAuto shares of MYR0.50 par. The bonus issue, worth MYR163m in share capital value, will be distributed from its share premium account. The entitlement date has yet to be determined as the proposal is pending approvals from the relevant authorities and shareholders. This exercise is expected to complete mid-2015.
• What’s Our View? The 2-for-5 bonus issue has no impact on our earnings forecasts. Our EPS forecasts and target price are unchanged for now pending completion of the corporate exercise. However, the bonus issue would enhance BAuto’s shares trading liquidity and improve its perceived affordability. Its total number of shares will be lifted by up to 40%, from 813.5m to an enlarged share base of between 1,139k and 1,141k (depending on the exercise of ESOS options amounting to 1.3k shares).

This is BAuto’s first bonus issue since its IPO in Nov 2013. We continue to like BAuto’s earnings growth prospects from: (i) attractive new launches (i.e. Mazda3 CKD, Mazda6 FL, CX-5 2.5L FL CKD, CX-3), (ii) cost exposure to the suppressed JPY/MYR forex and (iii) presence in high TIV growth market, the Philippines (2M15 TIV: +21% YoY). Also, with its strong net cash position (MYR319m as at end-Jan 2015), we do not rule out the possibility of a special dividend or acquisitions (i.e. raising stakes in Inokom/MMSB/BAP).