FW: Post briefing update: Inari Amertron (BUY; TP: MYR2.98), Results: MBM Resources (MBM MK; BUY; TP: MYR2.75)

 

Inari Amertron (INRI MK; BUY; TP: MYR2.70) - Is Not Another Ridiculous Idea

 

• A refined business model as an insourced partner. Years of strong working relationship with its key clients (i.e. Broadcom and OSRAM) now qualifies Inari as a trusted insourced partner. Inari remains committal in capex alongside the required ramp up by its clients. As such, Inari’s business model has been refined, focusing on higher production value add which has significantly improved its margins. Post briefing, we raise our FY18-20 net profit forecasts by 5%-15% on margin expansion to FY17’s level. Our TP is lifted to MYR2.98 (+10%), pegged on unchanged 20x CY18 EP.
• Further insights into FY17’s financials. Inari’s FY6/17 gross profit/operating margins jumped 3.7ppts/5.5ppts YoY on (i) better sales mix (growth in high-margin products such as RF, fiber-optics, IR LED components vs contraction of low-margin legacy optoelectronic products) and (ii) reduced material turnkey (high revenue but low margin, trading in nature) due to consigned materials by its key clients. Also, tax expenses picked up in 4QFY17 due to the expiry of its pioneer status in Mar 2017; another pioneer status would likely conclude in 2HFY18 hence expect higher tax expense in 1HFY18.
• Raise FY18/19/20 earnings by 5%/15%/15%. We raise our FY18-20 net profit forecasts by 5%-15% on (i) lowering revenue forecasts by 3%-9% but (ii) raising operating margin estimate to 18% (a new normal level, from 16% previously), both on reduced material turnkey. Sustained planned capex to the tune of ~MYR120m in FY18, mainly for the P-13B plant [both Phase 1 (60k sq ft) and Phase 2 (120k sq ft) would double the floor space of the overall P-13 plant], necessary to sustain a double-digit production growth p.a. at the RF division in light of 5G cellular network adoption in the next 5 years.

 

 

MBM Resources (MBM MK; BUY; TP: MYR2.75): Below expectations

• Deep in value still. 1H17 results disappointed yet again mainly on (i) weaker-than-expected associates’ and JV income, the former mainly from weakness at Perodua, and (ii) continuous losses at the auto manufacturing division. We cut our FY17/18/19 net profit forecasts by 21%/7%/3% and our TP to MYR2.75 (-7%), pegged on unchanged 10x CY18 PER. The stock still offers deep value, trading at just 8x FY18E PER and 0.5x FY17E P/BV.
• Hopeful for a 2H18 recovery. The story of MBM continues to be anchored on its 22.3% owned Perodua which is anticipated to launch the brand new Myvi in 4Q17. After little success in the previous launches (i.e. Axia and Bezza), we are hopeful for a strong rebound in associates’ income from a lower base. Also, potential job wins to supply alloy-wheels for the new Myvi could finally lift MBM’s loss-making OMI above its breakeven level, staging a meaningful earnings recovery in 4Q17.