Inari Amertron’s private placement might fund sizeable M&A

by NUR HAZIQAH A MALEK / pic credit:

INARI Amertron Bhd’s proposed private placement of up to 10% of the total number of issued shares, which can raise up to RM1.07 billion in multiple tranches, might finance an imminent sizeable merger and acquisition (M&A).

A sizeable M&A could lend into the acceleration of the company’s growth and be value-accretive, thus leading RHB Investment Bank Bhd to maintain a ‘Buy’ call on the technology company with a target price (TP) unchanged at RM4 and 23% upside for financial year 2022 (FY22).

RHB analyst Lee Meng Horng said the forecast on Inari is unchanged pending further developments on the proposed fund raising and potential M&A or major capital expenditure (capex) investment plans.

“We are neutral on the proposal, given the scarcity of information. We continue to like Inari for the visible growth in its radio frequency (RF) business and adoption of 5G technology in smartphones which is poised for mid-term structural growth — coupled with unswaying market interest in the technology sector,” Lee noted in a report last Friday.

Lee said based on the indicative issue price of RM3.20 per share, a maximum of 333 million placement shares may be issued to independent third-party investors — potentially raising up to RM1.07 billion.

“Some 98.4% of the gross proceeds or RM1.05 billion are earmarked for capex, acquisitions and investments purposes — the remainder is for placement related expenses,” he said.

He added that other than planning to increase its production capacity for its RF business and invest in automation, the exercise will also help accelerate plans to acquire complementary semiconductor and outsourced semiconductor assembly and test-related firms that need to be completed at tight timelines without incurring major financing costs.

“The proposal is expected to be completed in the first half of 2021, upon securing approvals from the authorities and exchange,” he said.

Lee said the company is sitting on a net cash of RM755.2 million as of the second quarter of 2021, and an operation cashflow generation ability exceeding RM300 million per annum.

“Besides, raising its war chest in such a prevailing upcycle market valuation could be optimal from its capital structure point of view.

“On a pro forma basis, earnings per share dilution would be at circa 9.1%, assuming the maximum scenario before taking into account the proceeds utilisation,” he said.

He added that Inari’s net asset per share could rise to 65 sen, while net cash per share may increase to 54 sen from the current 23 sen.

“Forecasts are unchanged pending further developments on the proposed fund raising and potential M&A or major capex investment plans.

“Our RM4 TP is based on an unchanged 40 times FY22 forward price to earnings ratio, at +3 standard deviation from its five-year mean,” he said.

He said among the key downside risks to the call include weaker than expected orders for 5G smartphones.

“The risks to downside also include the potential escalation of the US-China trade war and stronger than expected ringgit versus the US dollar,” he said.