This article first appeared in The Edge Financial Daily, on March 7, 2016.

Inari Amertron Bhd
(March 4, RM3.35)
Maintain buy call with an unchanged target price (TP) of RM4.30: We are positively surprised by the RM100 million matching grant awarded by the Malaysian Investment Development Authority (Mida), a testament to Inari’s capabilities.

Look beyond temporary earnings weakness in the third quarter of financial year 2016 as Inari continues to offer long-term growth prospects. Our forecasts and RM4.30 TP (17 times calendar year 2017 earnings per share) are unchanged for now. Reiterate Inari as the top pick of the sector for its improved earnings visibility and strong growth prospects.

Following the acquisition of the P-21 plant for the setting up of Inari Integrated Systems Sdn Bhd (IIS), a wholly-owned subsidiary of Inari, Mida granted a RM100 million matching grant to Inari to upgrade its P-21 plant and for the purchase of equipment and machineries. This is to power Inari’s next growth engine in the areas of advanced communication chips and die preparations.

The RM100 million one-for-one matching grant for capital expenditure (capex) spent is broken into: i) RM20 million in convertible preference shares at 2% dividend per annum (pa) issued to Mida, convertible into Inari shares at any time within a three-year period, at a price to be determined. At Inari’s current share price, for example, this would be converted into 0.6% additional shares; ii) RM80 million to be disbursed by Mida to IIS over a period of three years, on a gradual basis as and when capex is incurred, at an interest rate of 2% pa (10 years) on the amount drawn down; a reasonable rate.

Having factored job wins worth RM150 million/RM300 million into our FY17/18 forecasts previously, we see further earnings upside as Inari populates P-21, its largest plant, over the next nine to 12 months for mass production. For this, we expect Inari’s capex to hit RM150 million/RM200 million in FY16/17. Its unutilised land in Batu Kawan Industrial Park is a wild card. Inexpensive valuations (0.8 times profit-earnings growth) for 20% three-year earnings compound annual growth rate; “buy”. — Maybank IB Research, March 4