Tuesday, 1 October 2013

Inari Breaks Out

Inari is flying into RM1 territory, after Affin Research raises its target price from RM1.11 to RM1.70.

After announcing a strong FY13Q4 result in wrong timing back in 27th August, which coincided with the slump in emerging share market, Inari's share price finally moves, and it breaks the RM1 resistance convincingly.

Inari's share price closed at RM1.11 on the first day of Oct 2013.

For its FY13Q4 ended 30th June 2013, Inari produced a surprise by recording a net profit (without any tax incentive) of RM13.1mil , bringing the total net profit to RM42.0mil for the whole FY2013. This is an impressive 111% increase compared to RM19.9mil in FY2012. Its revenue also increases 34% from RM180.8mil to RM241.1mil in the same period.

Newly acquired Amertron's revenue & profit is still yet to be added to Inari's profit & loss until the first quarter of FY2014 (Jul-Sep 2013).

Does Inari really worth RM1.70? I believe it is.

I will use a super simplified method to calculate my own target price for Inari.

Lets assume Inari's impressive FY13Q4 result does not grow or even sustain for the whole FY2014. I'll give a target net profit of RM44mil (average RM11mil each quarter) for Inari and RM12.5mil for Amertron for FY2014 ended June 2014 (Amertron recorded USD4 million net profit for 2011). So, total predicted net profit of Inari-Amertron will be RM56.5mil for FY2014.

With current 454 million shares, Inari's predicted EPS will be 12.4sen. Globetronic is trading at PE of 19.6 currently. If we give Inari a target PE ratio of 12x, then Inari's target price will be RM1.49. If the PE is to be like Gtronic, then Inari's target price should be RM2.40. However, this does not include the dilution effect by future conversion of warrant. 

This scenario is base on only 5% growth in Inari's net profit YoY (from RM42mil to RM44mil). If Inari grow more than this, which it is likely to do so, then the target price will be even higher. The management targets to achieve RM1 billion revenue in 3 years time. If the net margin is 10%, then it will be RM100mil net profit in FY2016.

In Affin's report, they are optimistic that Inari 51% owned subsidiary Ceedtec may grow to become a RM500 mil revenue company in the future. Currently Ceedtec's revenue is just RM13mil and  has been making loss in FY13.

Inari still depends on Avago so much as almost 94% of Inari's total revenue comes from Avago. Even after adding in Amertron, a big chunk of profit will still come from Avago. As with other technology stocks, the risk will still be there. 

Anyway, Inari targets to attract institutional investors and will transfer to main board likely before year end. This may give another boost to its share price.

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