Inari Amertron (0166) – Oversold now or more downside to be seen?

Disclaimer : This post is for informational and educational purposes only. Investors should make their own informed decision to buy / sell the stock. We do not promote any kind of buy call or sell call on this post. Please do your own due diligence before investing or trading.

Closing price as of 4/1/2019 –> RM 1.230 (Current PE standing at 16.16)
Intrinsic Value –> RM 1.06 (After 20% margin of safety)

Main business : Semiconductor works and RF chips manufacturing for big smartphone maker brands.

Key Ratios CAGR (5 Years Ending 2018) :-

  • Revenue 11.63%
  • Profit After Tax 20.97%
  • Cash and Bank Balance 47.21% 👍
  • ROE -8.93% (No ROE growth but maintains above the 20% ROE threshold)

Dividend Policy : Yes

Inari’s profitability is to be seen being hit by the issue with Apple’s disappointing current and future smartphone sales prospects, mainly due to slow down of customer streams in China as a result of trade war.

However, is this really the end for Inari? After studying into Inari’s latest annual report, the outcome could hit them really hard. According to them, there are two main customers who account to >10% of total revenue, which is namely customer A and customer B.

Customer A – RM 903 million out of RM 1.376 billion
Customer B – RM 372 million out of RM 1.376 billion
Total – RM 1.275 billion out of RM 1.376 billion (92.66% of total revenue!)

Assuming global smartphone sales trend is slowing down due to oversupply and Apple products are no longer being the favorite of phone users, we should cut both of the main customer’s revenue by a margin of 20%.

RM 1.275 billion x 80% = RM 1.02 billion
Assuming there are no growth of stagnant from the remaining customers which is equivalent to the remaining 7.34% of total revenue. (7.34 x RM 1.376 billion) = RM 0.1 billion
Total : RM 1.02 billion + RM 0.1 billion = RM 1.12 billion revenue.

Previously, the net profit margin of Inari stays around 12.7% – 18.9%. Having their revenue cut, it will affect the economic of scale, which to put in simply their fixed costs are still same, but variable costs increased on per unit based product due to lower order volume. Let’s take a safe number of 15% net profit margin in the future.

RM 1.12 billion x 15% = RM 168 million net profit
To calculate EPS, we divide the net profit by NOSH, which end up with a 0.053 EPS.

Using a standard PE for technology stocks (20x PE) during good times, we should end up with the figure of RM 1.06. Hence the intrinsic value of Inari should be around RM 1.06 conservatively (after the huge estimated cut on the order book.)

Despite all the headwinds for Inari, we still would love to own the stock as the management are great, and according to the latest QR report, their cumulative 3 months operating income are still cash making. Plus the huge cash pile they are holding (RM 546 million) compared with minimal debt level, it’s definitely a great company.

A huge “but” is the gloomy outlook for global economy and oversupply of high-end smartphones. Brands like One Plus and Xiao Mi are slowly eating up the market share, and surely that would impose a material impact on the group’s future profitability. That being said I still see smartphone will bloom the market once again once 5G technology is implemented in smartphones in the future.
We would slowly collect Inari around the intrinsic value of RM 1.06. For now, we remain KIV for the stock.

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