Inari Get Ready To Fly?

Inari Berhad just completed the acquisition of Amertron, a company double its size.

Since listed in ACE market in July 2011, Inari has acquired 51% in Ceedtec in Jan 2012, who is a sole ODM partner of Agilent Technologies in Malaysia. This seems to have increased Inari's top and bottom line for the FY2013 ended June.

       Inari Technology

Now here comes a big one. Inari has acquired 100% stake in a Philippines company Amertron for USD32 million. Amertron has 2 plants in Philippines and one in China, and 3700 employees. It is an electronics manufacturing service (EMS) provider like Inari, specialize in optoelectronics especially in aerospace and defense industry. It has Avago and Osram as its main customers.

While listed in 2011, almost 100% of Inari's business comes from Avago Technologies, which involves the assembly of radio frequency chips in smart phones and tablets. Avago is a market leader in RF space and is also a major shareholder in Inari at 9.67% (at FY end 2012).

Inari has posted a series of strong quarterly results since listed in July 2011. With the potential jump in revenue and earnings after the acquisition of Amertron, its share price has rallied since April this year to 70-75sen. Its IPO price is at 38sen per share.

Inari's share price seems to have a strong resistant at 75 sen. If it breaks this resistant convincingly, it may sail upwards until one day when smart phones or tablets are no longer popular.

Is the share price or PE ratio too high now, especially when the amount of shares also increased? 

       Amertron Global

Below is the amateur Dummy's calculation.

Base on Inari's current FY2013Q3 financial result, it posted a net profit of RM12.4 million in Q3 and a cumulative net profit of RM28.9 million. However, RM4.1 million is earned from some tax incentive. Without this special gain, Inari's FY13Q3 net profit should be around RM7.9 million (tax rate ~5%).

Assume that Q4 earning is similar to Q3 at ~RM8 million, then the total net profit for FY2013 should be around RM32 million. 

After the issuance of rights issue, new shares, warrants bla bla bla, the total shares of Inari has ballooned from 331,608,700 to 442,993,778. Base on this figure & estimated net profit of RM32 million, the EPS of Inari in FY2013 (ended June 2013) should be 7.2sen, giving it a PER of 10x (current share price of 72sen).

This calculation does not factor in the contribution from Amertron. According to report, Amertron's turnover in 2011 is about USD120 million (RM380 million). With Inari's own estimated revenue of RM230 million in FY13, we can expect a 3 fold jump in Inari's revenue once Amertron is fully consolidated into Inari.

Nevertheless, a 3x jump in revenue does not mean a 3x jump in net profit. It is reported that Amertron's net profit in 2011 is USD4 million. If there is no change in its profit, it will contribute after tax profit of RM12.5 million to Inari yearly.

Assume that in FY2014, there is no growth in Inari+Amertron's profit, the net profit of Inari in FY2014 should be RM44.5 million. EPS will be 10sen and PER 7.2x at current share price of 72sen.

Once the warrants are fully converted in 5 years time, the total shares will come to 645,858,128 shares. If the earning does not change at that time, EPS will be 6.9sen & PER still at 10.4x for share price of 72sen.

From Inari's current earning trend and global trend for smartphones & tablets, it is likely that Inari will continue its growth trajectory especially with recent increase of 30,000 sq ft facility in Senai, Johor. As long as Amertron's business does not shrink markedly, Inari should have a good prospect ahead.

Besides, Inari also pays attractive dividend. It has a dividend payout policy of paying at least 40% of its net profit. The dividend yield is 7% in FY2012. If Inari's net profit in FY2014 is really RM44.5 million, then it will pay RM17.8 million as dividend or 4sen per share, which gives 5.6% yield at the share price of 72sen.

Inari's revenue & profit will still depend heavily on Avago. Will Avago stop doing business with Inari in the future? Well, Avago is the third largest shareholder in Inari. Furthermore, Avago has recently extended the manufacturing agreement with Inari for further 3 years til 30th April 2016.

From its balance sheet ended 31st March 2013, Inari is in a net cash position with RM31 million of cash and RM19 miilion of debt. The acquisition of Amertron does not deplete the cash or increase the borrowing much as it is funded mainly through rights issues and new shares.

       Inari daily chart

Inari's share price has surged more than 100% since we step into the year 2013. Does it still have room to go up further? Which would you choose between Gtronic & Inari? In the technology world, things can turn sweet & sour very fast.

The 42 Stocks By "Cold Eye"

One of the most famous and successful stock market investor in Malaysia, Fong Siling (Cold Eye) has given the public a list of 42 good stocks in Malaysia stock market earlier this year. Fong Siling is a "value investor", like Warren Buffet, who adopts fundamental analysis to identify good stocks and hold for long term.

       "Cold Eye"

Most of us want to know what stocks Mr Fong actually hold. However he probably won't let us know. You can screen all listed companies annual reports to find out their top 30 shareholders to see whether Fong Siling's name is there.

Now you can save your time, as Mr Fong has given us 42 stocks potential which he thinks are worth to invest in or at least pay attention to. This means that he will probably own these stocks or plan to own them in the future.

So if you are lazy to screen the stock market with more than 1000 stacks, just concentrate on these few stocks and pick a few which you think the best after doing your homework.

Below are the summary of the 42 stocks from nanyang press, published on 17 March 2013. Since it was 3 months ago, a lot of things have changed.

Translation in English:

1. PPB - Share price drops recently, mainly due to drop of Singapore major shareholder Wilmar International. However, temporary setback is also an opportunity.

2. Orient - Has good assets. Can pay attention.

3. MSC - Predict that this year it can get good profit & pay dividend. Actually a good blue chip. Has good management team. Besides, the price of tin has risen 40% since last year.

4. Canone - Personal suggestion is "buy". Share price is stagnant recently because of legal issue. Though slight high gearing, but I'm not too concern, as cash flow & earning are very good.

5. PIE - High dividend yield, but share price did not move much.

6. Scientx - Business covers plastic mould & property development. No debt.

7. Tecnic - Has good earning record. Give dividend and no debt.

8. MBSB - Personally think it is good. Has the potential to become a good blue chip, but need time.

9. NHFatt -Has good earning record.

10. Harta - Personally think it is the best glove stock. Though high PE ratio, its future plan is great.

11. Kossan - Personally think that glove market is still growing, must choose strictly. This is not bad.

12. QL - Ordinary business. Continue to grow. A company with a good management team.

13. Jobst - "Not bad" company.

14. Hapseng - A low share price company is not necessarily not good. A good company with diversified business.

15. Suria - Owns all ports in Sabah. Not bad.

16. ECS - Sell computer components. No debt. Has advanced and good management team.

17. Multico - Has good prospect. No borrowing. Has contracts on hand. Has chance to give dividend.

18. Favco - International company. Has factories in many countries. Has many contracts on hand.

19. Faber - Government-linked. Cash rich. Recently announced new contracts. Can give good dividend.

20. FACBInd - Has good cash flow.

21. GCB - Operate largest cocoa factory in the world. Big business. Good management.

22. Coastal - A shipping company. Can pay attention.

23. Benalec - Can pay attention. Do your own homework.

24. GTronic - Profit increased for the past 2 years. Estimate the trend can continue for 2-3 years.

25. Huayang - Property developer. Has good future plan. Build affordable homes.

26. Prestariang - Good dividend policy.

27. P&O - The best in insurance industry.

28. Pwroot - Can pay attention.

29. Unimech - Indonesia's business expands rapidly and can reach Malaysia's business size in 3-4 years. Can even hope to be listed in Indonesia.

30. UOADev - Cash rich. Good business skill.

31. Maybulk - A stock with contrary thinking. Suggest to buy in 2nd half 2013 or 1st half 2014. Company not only involves in shipping, but also ships trading. Recently bought a few good ships, which indicates shipping industry cycle has reach bottom. However, need to wait and do homework.

32. Cypark - Good business. Can pay attention.

33. Hevea - Particleboard and furniture business. Cash rich. Successful in entering China market.

34. Fitters - Diversified business, develops property. Debt free.

35. Daya - Can pay attention. Yearly profit RM2.8 billion, and plans to reach RM10 billion in 2015.

36. Ivory - There is rumour that condominium in Penang are sold at RM700psf, and 70% were sold without advertisement. Estimate that it can be even better after election.

37. L&G - Share price has dropped from peak to bottom, but successfully turned land without value into valuable land. Should perform well in the next 2-3 quarters. Cash rich, low gearing.

38. JCY - Semi conductor industry is affected by business cycle.  Recently its share price begins to rise, but can't guarantee the trend will continue. But, the room for drop is limited.

39. Unisem - Another semi conductor company that worth paying attention to. Can buy when it drops, and hold it.

40. MBL - A plantation company with good dividend yield.

41. MMode - A stock in ACE market. Has cash, in net cash position, pay dividend. Can hold.

42. Tambun - A stock that pay dividend and in net cash position.

You may think that a few stocks are not worth to be in the list or a few other stocks are even better than these. It is your choice, you do your own study, you made your own decision with your own money.

Gearing Ratios

Gearing is a measure of a company's leverage. The higher the leverage of a company, the more risky it is.

A company basically made up of 3 components, as stated in its balance sheet:

1. Assets (what the company own)

2. Liabilities (what the company owe to others)

3. Equity (investment by shareholders/owners)

To start a new company, we need to have initial investment from shareholders (equity). The company will then use the equity fund to buy assets and run its business. To support and grow the company, most of the time it will need to get loans (liabilities).

In a balance sheet, all 3 components must be balanced:

Assets = Equity + Liabilities

This means that a company can get fund/money by 2 ways:

1. From shareholders or owners (equity)

2. From creditors (liabilities)

The fund acquired through shareholders & creditors are kept in the company as assets. Thus, assets = equity + liabilities.

There are two types of liabilities:

- operational (payables): owed to business partners

- debt (borrowings): owed to banks/creditors

We can measure the degree of a company's leverage with gearing ratios. Basically these ratios tell us how much the business activity is funded by shareholders fund vs creditors fund.

Debt Ratio = Total Liabilities / Total Assets

- a quick measure of a company's leverage, the lower (<1.0) the better

Debt to Equity Ratio = Total Liabilities / Shareholders Equity

- indicates the proportion of equity & debt the company is using to finance its assets

- creditors vs shareholders - who owns the company more?

- the lower (<1.0) the better

Debt to Capital Ratio = Debt / Shareholder Equity + Debt

- indicates debt-financing vs equity financing

Current Ratio = Current Assets / Current Liabilities

- Current Assets: Cash & cash equivalent, inventories, receivables

  Current Liabilities: Current debt, payables

- the higher (>1.0) the better, indicates whether the company is able to pay its debts in short term (<12 months)

Interest Coverage Ratio = EBIT / Interest Expense

- measures ability to pay interest expenses of outstanding debt (better >1.5)

Cash Flow To Debt Ratio = Operating Cash Flow / Total Debt (borrowings)

- measures ability to cover total debt with yearly cash flow from operation

There is no "standard" value for the ratios above, as it is different between various industries. Generally, if the debt/liabilities is the numerator, the lower the ratio the better it is. If the assets/earning is the numerator, the higher the ratio the better.

The above formulas are text book formulas. However, I notice that for debt to equity ratio which is widely used by analysts, NET borrowing is used instead of total liabilities.

This means the numerator is total borrowings (not including payables) minus cash & equivalents. 

Anyway, I think that no matter which formula you use, just choose only one and use it for comparison purpose.

Pearl City 100% Belongs To Tambun Indah

On the 21st June 2013, both Tambun Indah & Nadayu have their share trading suspended. 

Nadayu owns 30% & 40% in Tambun Indah Land Berhad's subsidiaries Tambun Indah Development Sdn Bhd. & Palmington Sdn Bhd. respectively.

When both companies have something to announce at the same time, it must be related to the matter above. The Edge reported a possible merger between Tambun Indah & Nadayu. Fortunately it is not a truth. As a minor shareholder of Tambun Indah, you don't want to merge with a badly managed company (though it carries quite a lot of landbank in Klang Valley).

Nadayu is previously called Mutiara Goodyear who first developed a township in Simpang Ampat, Seberang Perai Selatan called Bandar Tasek Mutiara in the early 90s. Later Mutiara Goodyear's major shareholder left and sold its shares to ATIS/Zhuojian, who then changed its name from Mutiara Goodyear to Nadayu.

After that, Nadayu sold its land at Bandar Tasek Mutiara to Tambun Indah, in which a JV 60:40 Palmington Sdn Bhd was formed to develop it. Tambun Indah has then successfully developed the land so far, with the target to turn it into an integrated township called Pearl City.

       Bandar Tasek Mutiara master plan by Mutiara Goodyear

So if it is not a merger between the two, then it must be related to these companies. True enough, both companies announced that Nadayu will sell its remaining shares of 40% in Palmington & 30% in TID to Tambun Indah (TILB). The purchase price is RM112 million and will be settled with RM40.7 million of cash & 55 million new Tambun Indah shares at RM1.30 each.

Pearl City development projects have been Tambun Indah's current & future profit generator as a big chunk of revenue (60% in 2012) and landbank come from here. So if you realize that Tambun Indah will only enjoy 60% of the potential of Pearl City, then it is some kind of setback. If the proposed sales & purchase go through, then Tambun Indah can expect better earning in the future by owning 100% of Pearl City.

       Pearl City Business Park

At the same time, Tambun Indah also announced a proposed private placement of 15 miilion (4.7%) new shares. Together with Nadayu's 55 million (17.3%) new shares, earning will be diluted by about 22%. Nadayu will become a major shareholder in Tambun Indah.

Nevertheless, the issuance of new shares should be justified, as it is not easy for a small cap company to fork out more than RM100 million (Tambun Indah has RM94 million cash). Too much bank borrowing is also not very good, though currently Tambun Indah has a very low gearing. With its earning potential after the purchase, Tambun Indah may earn more to maintain or even improve its earning per share.

       Tambun Indah first project in Pearl City - Pearl Garden in progress

Back to Nadayu, in year 2011 its boss said that the company is confident to achieve RM500-600 million of sales in 2011 & 2012. The outcome is, it only manage to sell RM175 million in each of these 2 years when almost all property developers' revenue and earning soar. Its net profit stood at RM15.8mil & RM9.6mil for the past 2 years.

According to news, Nadayu's major shareholders plan to privatise Nadayu with RM1.39 per share. With the cash from the disposal of its associates, Nadayu can concentrate on other property development projects, while still able to benefit from the development of Pearl City by holding 15% of Tambun Indah's shares.

Tropicana: New Name, New CEO, New Level

Since year 2010, Dijaya has been busy buying lands. In Aug 2012, almost RM1 billion worth of private land & properties were injected into it through the amalgamation exercise. All this has turned its balance sheet from a net cash position in 2010 into 0.8x gearing with a total borrowings of RM1.8 billion  at the end of FY2012.

Dijaya seems not satisfied being a mid-size property developer. It certainly wants to join the likes of UEMLand, SPSetia, Mahsing, IJMLand & Sunway. 

After the amalgamation exercise and ballooning of its debt, Dijaya has undergone a de-gearing exercise which aims to reduce its gearing from 0.8x to 0.5x in 12 months. The CEO has been changed to Dato Yau, the ex-Sunway MD who is experienced in de-gearing. The company name has been changed to Tropicana Corporation Berhad.

Through the de-gearing exercise, Tropicana will dispose some of its "not-so-strategic" land and non-core property investment to generate some cash. This exercise enables Tropicana to reduce its debts and concentrate on a few important property development in the future.

For the FY ended in 2012, Tropicana's revenue increases almost 70% from RM374m to RM630mil. Its net profit jumps 160% from RM65m to RM169m, mainly through sales of land which generate a handsome profit. It has sold 6 parcels of land worth RM219m in 2012. Tropicana has said that land investment/trading has become one of its business.

In year 2013, the land sale continues with the disposal of Tropicana Bayou Balakong & Desa Aman Puri Kepong. Yesterday, Tropicana announced that it has sold a 6.41 acres commercial land worth RM116m in PJ within the Tropicana Golf & Country Resort to Mulpha Land. 

       Penang World City

Ironically, while it is busy de-gearing itself, in mid April 2013, Tropicana announced that it has purchased a huge land at Canal City measuring 1172 acres from Selangor government at a price of RM1.3 billion (RM25 psf). However, this land purchase is widely viewed as a positive move because of its location within the Klang Valley and its big size which can be developed into a well-planned township.

The Canal City was initially a flood mitigation plan by the state government but it has been aborted in 2011. Most of the Canal City land (1900 acres) has been given to IJM Land and it has been used to develop Bandar Rimbayu, where its recently launched first phase has received overwhelming response. The rest of the land is now acquired by Tropicana.

With the inclusion of the Canal City land, the total land banks of Tropicana has more than doubled from 900 acres to 2000 acres, with an estimated GDV of a whopping RM70 billion, which is the highest among all property developer in Malaysia. With a market cap of RM1.8 billion (RM1.90 per share), its GDV/market cap ratio stands at 39x, in which most other big players stand at below 10x.

       Tropicana Metropark

This reveals Tropicana's ambition to grow towards a big cap company. For this, it must have strong institutional investors, which it currently lack. Thus, in early June 2013, Tropicana's chairman has sold 2% of his shares to EPF at a price of RM1.78 per share. The company says that it will continue to attract more institutional investors.

	Year	RM mil
		Revenue	Net Profit
	2008	247	33
	2009	311	50
	2010	292	45
	2011	373	65
	2012	630	169

The net profit of RM169m in FY2012 is what Mahsing earned in FY2011. Though the revenue has grown massively, it is partly contributed by land sales. As the company will continue to sell more land or investment property, do expect the quarterly earning to be patchy. 

However, it is expected that Tropicana will continue to post strong revenue & earning for the next few years from land sale and new property launch. Besides, Tropicana also has a stream of good recurring income from its property investment division, mainly from Tropicana City Mall & Office rental. It has an unbilled sales of RM951 million at the end of 2012.

       W KL Hotel & Residence

The reason for the high GDV Tropicana enjoys is the strategic location of its land banks. Currently Tropicana has lands in 3 hottest property spots in Malaysia, which are Klang Valley, Iskandar and Penang island.

       Tropicana Danga Bay - Tropez Residences

In FY2013, Tropicana plans to launch RM2 billion worth of property. This includes Tropicana Gardens in Kota Damansara which are almost sold out for the first 2 phases launched earlier this year, Tropicana Metropark at Subang Batu Tiga, Tropicana Heights in Kajang, W KL Hotel & Residence at KLCC (starwood brand), Tropicana Danga Bay & Danga Cove in Iskandar, Tropicana McAllister & Penang World City in Penang island.

       Tropicana Gardens

Having a lot of assets or land in strategic location does not translate into success. It depends on the skill of the management team to turn it into good profit. Tropicana needs to come out with good project at good timing in order to grow consistently and become a big player.

If you believe in current Tropicana's management team and you believe that the property sector can strive for at least 5 more years (people start to talk about property bubble since 2010), then Tropicana's shares may be good to hold.