AnalysisBursa

10 things I learned from the 2019 Inari AGM

Listed on the ACE Market of Bursa Malaysia in 2011, Inari Amertron Berhad is principally involved in back-end semiconductor packaging services, which mainly comprises back-end wafer processing, package assembly, and radio frequency (RF) final testing.

The company acquired Amertron Inc (Global) Ltd for RM103 million in June 2013, adding optoelectronics and fibre-optic packaging services to the group. The company has a total of nine plants across Malaysia, the Philippines, and China. U.S.-listed Broadcom Inc. is a key customer which contributes more than 70% of Inari’s revenue.

Over the past few years, technological advancements of the smartphone had helped boost earnings, resulting in high returns for its shareholders as Inari’s share price increased by more than fivefold from 49 sen in December 2014 to RM2.48 in August 2018.

However, the slowdown in demand for smartphones affected Inari’s earnings and its share price. From its peak in August 2018, Inari’s share price crashed 49% by January 2019. Although the stock partly recovered, it recently fell again when the Wall Street Journal reported that Broadcom was looking to sell one of its wireless-chip units. As of 21 January 2020, Inari’s share price stood at RM1.71.

I attended the 2019 AGM to find out management’s plans to get Inari back on a growth path.

1. Revenue decreased 16.2% year-on-year to RM1.15 billion in FY2019 (ended 30 June 2019), from RM1.38 billion in FY2018. This was due to comparatively lower volume loading on a major sensor product, changes in product mix, and the disposal of assets of a 51%-owned subsidiary in FY2019.

2. Net profit decreased 26.1% y-o-y to RM192.3 million in FY2019 compared to RM260.1 million in FY2018. This was mainly caused by lower orders, changes in product mix, and higher depreciation cost arising from the additional capital expenditure of RM183.9 million in FY2019 compared to RM163.5 million in FY2018. The capital expenditure was made for the continued expansion of facilities, increases in production capacity as well as on-going automation and cost optimisation measures.

3. Construction of Inari’s new plant P34 in Batu Kawan was completed in May 2019. With a total construction cost of RM80 million, P34 is Inari’s biggest plant yet, comprising three buildings of six stories each with a total floor space of 680,000 square feet. According to management, Block A has been allocated to a major customer, which the management revealed to be Germany’s OSRAM Licht AG; Block B will be catered for spillover RF testers in preparation for future 5G business; and Block C will cater to new customers in the future. A shareholder asked whether any new clients have taken up the capacity for Block C. CEO Lau Kean Chong replied that several potential clients have enquired and visited the building to determine its suitability to their needs. He estimated about three years for Plant P34 to reach full capacity.

4. Citing the failed acquisition of OSRAM — a German multinational lighting manufacturer — by Austrian chip and sensor maker AMS in October 2019, the same shareholder wanted to know if this had affected Inari’s orders from OSRAM. Lau said although OSRAM is on the lookout for new contractors, the business relationship is still good and he foresees business as usual with them. The shareholder also asked for an elaboration on the new products mentioned in the annual report. Lau answered that the new products introduced come from three segments: RF, fibre, and 3D sensing technologies. In the fibre segment, Inari had partnered with a Taiwanese firm, PCL Technologies Inc. in September 2019 to set up a joint venture to secure, manage, and manufacture optical transceivers and other related products in Penang. The business operations will be carried out in Plant P34 or other plants owned by Inari, and provide additional cash flow to Inari from the rental payable by the joint venture.

5. The same shareholder was concerned that as 5G becomes more and more popular, it would intensify competition between semiconductor players and wanted to know the management’s views regarding its effects on pricing. Lau replied that ever since he first started becoming involved in the outsourced semiconductor assembly and test (OSAT) industry, prices have always continued to trend downwards. To mitigate this, Inari continuously builds upon its competitive advantage and improves turnaround time to better meet customers demand. When asked about what margins he sees for FY2020, Lau shared that Inari sets a net margin of about 15-18%. He also claimed that Inari has one of the best margins among local OSAT players.

6. The RF business unit, which is Inari’s main revenue contributor, maintained at the company’s set margin. Plant 13 Block B utilisation was full by December 2019, and the RF tester capacity has exceeded 1,000 units as per plan. The management is expecting improvement in the demand of RF products in the short term with growth in RF content continuing in smartphones, the continuing adoption of 4G/LTE, the expected introduction of 5G by 2020, and continued innovation in new smartphone models.

7. Inari commenced the production of new health sensor and both 2D and 3D facial recognition modules for its Internet of Things (IoT) business segment in FY2019. IoT is the interconnection via the Internet of computing devices embedded in everyday objects, enabling them to send and receive data. MSWG wanted to know whether the production of the sensor and modules had reached full-scale production. The management replied they have been working on iris scanning facilities, and equipment deployment for the new sensor and facial recognition modules.

8. MSWG also wanted to know the expected percentage revenue contribution from these products for the IoT segment for FY2020. The management replied that they are presently prioritizing 3D facial recognition in the upcoming 5G smartphones and anticipates the IoT segment to contribute about 8-10% of overall revenue in FY2020.

9. The World Semiconductor Trade Statistics expects the world semiconductor market to grow to USD433.1 billion in 2020, with the overall market up by 5.4% in its semiconductor market forecast Autumn 2019 report. All major product categories and regions are forecasted to grow with Memory contributing the highest growth followed by Optoelectronics and Logic. Based on the positive outlook, Inari has budgeted a capital expenditure allocation of RM150 million in FY2020 for new and improved production equipment and facilities. The management said it will continue to implement the Industry 4.0 framework on a bigger scale to promote automation in its production processes.

10. A shareholder wanted to know where Inari sources its packaging materials from and whether Apple Inc.’s possible exemption from tariffs on Chinese imports would benefit Inari. Vice Chairman Dato’ Dr. Tan Seng Chuan explained that Inari sources packaging materials locally as long as they continue to meet quality standards because of the high cost of transportation from overseas. He further added that the exemption would be positive for the whole semiconductor industry, including Inari, as Apple is a major force in the industry.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Tags

Young Jia Yi

Jia Yi has been an investor since the age of 18, following the investing philosophies of Buffett and Munger. He currently works as an industry analyst in an independent investment research firm. He is passionate about understanding how things are interconnected in the world and enjoys reading in his free time.

3 Comments

  1. Hi. It’s been 7 months after since you post this article. What do you think about Inari now ? As Covid-19 pandemic is a disaster to many countries and companies. But technology companies seem taken the least impact among all industries.

    As we can see Nasdaq index is still keep going up and Malaysia’s technology counter it’s price is breaking new high everyday. But Inari price is slow.

    And what happening now we can see problem between U.S. vs China is getting serious day and day. I was wonder if Taiwan (TSCM) side to U.S. and abandoned Huawei, will this affected Inari
    financial performances? Will Inari order turn out to TSCM ?

    Please forgive me if my poor English 😔

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back to top button
Close