Investment Summary
We issue a BUY recommendation on Inari Amertron Berhad (INRI) with a target price of RM4.98 using the Discounted Cash Flow (DCF) method. This offers a 20.29% of upside from its closing price of RM4.14 on 1 December 2015. Our TP of RM4.98 implies a FY16 PE of 23.13x as we believe that INRI deserved to be trading at a premium due to its stronger growth potential with various buying points such as 1) Bright Prospects of RF Segment due to higher RF content in smartphone driven by increasing adoption of LTE network [Refer to Figure 8]]2) More Potential Outsourcing Opportunities 3) Beneficiary of Strong USD which is favorable to them as a major exporter. As there are high earning visibility for INRI with various strong catalysts …show more content…
According to the peer analysis that has been carried out, INRI has a moderate P/E ratio among its competitors (peer high 32.95; peer low 13.61). The ROE of INRI is the highest among its peers. The EBITDA margin is relatively lower than its peers and the net profit margin is slightly higher than the average of the peer group (14.09%). (Appendix) Key risks that the investors must look out include strategic risks such as high sales exposure to Avago, decline in consumer spending, cost of optoelectronic-based products and operational risks like delay in capacity expansion, accelerated average selling price (ASP) erosion, wafer shortage issue as well as financial risks such as foreign exchange risk and Malaysian currency …show more content…
The risk free rate of 4.2% was based on the 10-year Conventional Malaysian Government Securities (MGS) Rate as at 30 November 2015 while the market risk premium of 3.3% was computed by taking the differences of expected market return and the risk free rate. Market return is assumed to be at 20% discount on the basis of the average market return of 9.39% which is 7.512% since our market is expected to be slowed down due to current bearish economic outlook mainly by weakening commodity prices, presence of strong US Dollar and the slowdown in China. The average market return of 9.39% was computed by taking the average return of Kuala Lumpur Composite Index (FBMKLCI) from 2005 to 2014. Beta of 1.3 was the result from our team estimation of historical beta through simple linear regression method. The cost of debt of the INRI was computed using the weighted average interest of the different interest bearing borrowings of INRI and we used the average of the range of interest rate per annum obtained from the company data for our computation which resulted to a weighted average after tax cost of debt of 2.94% while the average cost of preference shares was based on the relevant instruments issued by INRI which is taken from their annual report. In overall, the WACC is 7.835% based on the market value weighted market value of INRI’s capital structure. [Refer to Appendix
We issue a BUY recommendation on Inari Amertron Berhad (INRI) with a target price of RM4.98 using the Discounted Cash Flow (DCF) method. This offers a 20.29% of upside from its closing price of RM4.14 on 1 December 2015. Our TP of RM4.98 implies a FY16 PE of 23.13x as we believe that INRI deserved to be trading at a premium due to its stronger growth potential with various buying points such as 1) Bright Prospects of RF Segment due to higher RF content in smartphone driven by increasing adoption of LTE network [Refer to Figure 8]]2) More Potential Outsourcing Opportunities 3) Beneficiary of Strong USD which is favorable to them as a major exporter. As there are high earning visibility for INRI with various strong catalysts …show more content…
According to the peer analysis that has been carried out, INRI has a moderate P/E ratio among its competitors (peer high 32.95; peer low 13.61). The ROE of INRI is the highest among its peers. The EBITDA margin is relatively lower than its peers and the net profit margin is slightly higher than the average of the peer group (14.09%). (Appendix) Key risks that the investors must look out include strategic risks such as high sales exposure to Avago, decline in consumer spending, cost of optoelectronic-based products and operational risks like delay in capacity expansion, accelerated average selling price (ASP) erosion, wafer shortage issue as well as financial risks such as foreign exchange risk and Malaysian currency …show more content…
The risk free rate of 4.2% was based on the 10-year Conventional Malaysian Government Securities (MGS) Rate as at 30 November 2015 while the market risk premium of 3.3% was computed by taking the differences of expected market return and the risk free rate. Market return is assumed to be at 20% discount on the basis of the average market return of 9.39% which is 7.512% since our market is expected to be slowed down due to current bearish economic outlook mainly by weakening commodity prices, presence of strong US Dollar and the slowdown in China. The average market return of 9.39% was computed by taking the average return of Kuala Lumpur Composite Index (FBMKLCI) from 2005 to 2014. Beta of 1.3 was the result from our team estimation of historical beta through simple linear regression method. The cost of debt of the INRI was computed using the weighted average interest of the different interest bearing borrowings of INRI and we used the average of the range of interest rate per annum obtained from the company data for our computation which resulted to a weighted average after tax cost of debt of 2.94% while the average cost of preference shares was based on the relevant instruments issued by INRI which is taken from their annual report. In overall, the WACC is 7.835% based on the market value weighted market value of INRI’s capital structure. [Refer to Appendix