Inari: In Dire Need For Capacity Expansion

Inari FY15Q1 Financial Result

INARI	FY15Q1	FY14Q4	FY14Q3	FY14Q2	FY14Q1
Revenue	221.9	223.9	191.8	186.6	191.3
PBT	33.9	31.4	27.2	26.6	22.1
PBT%	15.3	14.0	14.2	14.3	11.6
PAT	33.8	30.8	25.0	24.4	21.0
Total Equity	313.4	260.2	231.1	202.2	176.8
Total Assets	544.3	487.5	461.4	438.8	406.2
Trade Receivables	143.4	137.3	131.8	123.5	121.1
Inventories	135.8	137.8	137.7	126.2	107.4
Cash	89.5	65.3	53.2	60.0	48.9
Total Liabilities	230.9	226.9	231.1	236.9	230.0
Trade Payables	107.9	120.0	118.4	131.2	138.7
ST Borrowings	46.8	36.4	33.0	26.2	19.6
LT Borrowings	15.1	18.6	15.8	16.4	17.8
Net Cash Flow	14.0	20.9	8.8	15.3	4.3
Operation	23.7	41.2	12.4	11.5	7.2
Investment	-34.4	-43.4	-30.4	-14.5	-9.6
Financing	24.7	23.0	26.9	18.4	6.8
EPS	6.00	6.23	5.19	5.31	4.69
NAS	0.56	0.53	0.48	0.42	0.39
Net D/E Ratio	Net cash	Net cash	Net cash	Net cash	Net cash

Inari's FY15Q1 revenue drops less than 1% QoQ but PATAMI improves by 10%.

However, EPS drops 4% QoQ due to conversion of warrants.

Compared to FY14Q1, PBT margin increases significantly from 11.6% to 15.3%. Thus its PATAMI increases by 61% YoY despite 16% rise in revenue.

Inari's management has successfully improves the margin of newly acquired Ametron from 3.7% to 6.2%.

Its Radio Frequency unit has been running at full capacity since April 2014. It has already acquired a 5.5-acre leasehold land with a 2-storey factory at Bayan Lepas to expand its production.

Besides, it has also acquired a piece of 5.05-acre leasehold land in Batu Kawan industrial park for RM7.85mil. However, the Batu Kawan site is only expected to contribute from year 2016 onward.

Lots of warrants have been converted to Inari shares in year 2014 despite the fact that they will only expire in year 2018.

Though earning has been diluted, it shows investors' confidence in the company's future. I believe that many are eyeing its upcoming rights issue with free warrant, as well as its quarterly dividends.

As a result, cash increases to a record level of RM89.5mil.

Inari has announced its first interim dividend for FY15 and it does not disappoint for sure. It will pay 1.8sen single tier dividend plus a special dividend of 0.4sen. This is almost 50% higher than previous year's corresponding period!

Inari's Dividend History

Div (sen)	FY15	FY14	FY13	FY12
1st	1.8 (0.4)	1.1 (0.4)	0.8	0.6
2nd		1.1 (0.4)	0.9	0.6
3rd		1.2 (0.8)	0.9	0.8
4th		1.8 (-)	1.0 (0.9)	0.8

With the robust outlook of semiconductor industry at the moment, I think Inari still has room to grow.

The acquisition of the 166,000 sq ft factory in Bayan Lepas will increase its production capacity in RF business from early year 2015. It might also shift some of its fiber optics operation from Johor to the new factory.

Its 100%-owned Inari South Keytech (fiber-optics) & 51%-owned CEEDTec (test & measurement equipment) are expected to contribute positively in FY15.

Nevertheless, there are no financial info regarding those subsidiaries in Inari's quarterly financial report. So we can only get the info from analyst reports later.

Its proposed rights issue & free warrant is expected to complete in early January 2015.

I will set my guesstimated FY15 PATAMI for Inari at RM140mil, which represents a great 40% improvement YoY.

With current outstanding shares at 616mil which has increased quite a lot from end of FY15Q1, target EPS and target price will be 22.7sen and RM3.41 (PE 15x) respectively.

With 40% dividend payout, it might pay up to RM56mil in FY15 as dividend, or approximately 9sen per share. Dividend yield will be 3.1% at share price of RM2.90.

This means that it is likely to pay more than 2sen for the next 3 interim dividends in FY15.

Anyway, the rights issue will further dilute its earning about 12-13% excluding the new warrants. 

As I expect its bottom line to grow, I will keep my investment in Inari.