Wednesday, 23 July 2014

Inari: Should I Subscribe To The Rights?

Inari's net profit for its FY14 (ends Jun14) will surely doubles the figures of FY13. 

Can it grow at the same pace in FY15? It is unlikely because FY14 results are contributed largely by newly acquired Amertron.

Anyway, Inari itself still registered impressive organic growth at 50%.

Currently its four Penang facilities which mainly cater for RF products are running at a utilization rate of 90%. Even if it does not expand the floor space, it probably still can expect a satisfactory growth from maiden contribution from 51%-owned Ceedtec & 100%-owned Inari South Key.

Forecast by Maybank KE shows that both ISK & Ceedtec may contribute about RM100mil revenue (10%) in FY15.

Inari South Key, which was established just in 2012, has its facilities in Johor which manufactures fiber optics products. It is expected to do well due to increasing popularity of high-speed internet and cloud computing.

Anyway, I still can't grab the concept of cloud computing...

It was a surprise to me that Inari announced a cash call (1-for-8 rights issue with 1 free warrant) in early July 2014, since it just did the same thing a year ago in May 2013.

The first thing that came to my mind was, earnings will be diluted again...

However, as Inari urgently needs to expand its highly-utilized facilities, this can be a positive move. Perhaps it is better than borrowing from financial institutions which charge interest. Better save the loan interest to distribute as dividends right?

The indicative rights issue price is at RM1.50 per rights share and the indicative new warrant exercise price is at RM2.00 (1:1).

At current share price of RM3.25, this represents a great discount though the ex-ed share price will be adjusted. Anyway, the price is just indicative only.

Investors who subscribed to previous rights and kept the warrants are surely laughing all the way. The old warrant exercise price is just 38sen.

The table below from Maybank investment shows the possible dilution after the rights issues & new warrants.

The proposed rights issue will raise about 80+mil new shares (about RM120mil). It is expected that most existing warrants (expires in June 2018) & ESOS will be converted to Inari shares in order to be eligible to subscribe to the attractive rights issues.

Almost two third of the fund raised will be used to expand its production (new land/factory/machinery). It might set up a new facility in Batu Kawan.

Inari's major shareholder Insas has said that it will subscribe fully to the rights issue. However, I'm not sure whether it will convert its existing warrants before this.

As at today, Inari's total shares stands at 541 million.

The rights issues exercise is expected to be completed in the final quarter of CY2014.

It's a way to force myself to add more Inari shares. So I think I will subscribe to the rights issues.

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