Monday, December 9, 2013

Looking at Inari to understand Insas (Revised)

This is an update after a highlight from one of the readers. Thanks


Anyone who puts in money in Insas over the last 4 - 5 months would have made decent sum - increase from RM0.50 to now RM0.94, which coincidentally was about the period which I wrote about the company. In this particular article, I wanted to know what makes the sudden rise in the stock price whereas it has been in trading in the RM0.40 to RM0.60 for a long time.

I wanted to know what type of character are behind the owners. As in my previous article, again not much can be known except that it is led by a careful investor, Datuk Thong. To do this, I would like to take a look again at Inari. Inari is a hugely successful invested company made by Insas and I would deem it to be successfully managed by the group of management. Insas has about 36.6% of Inari and on top of that it has about 16% of its warrants. Those holdings in Inari alone is worth about RM292 million according to Inari's price todate.

Inari Amertron is involved in EMS business. Just for knowledge, the largest EMS company in the world is Foxconn or Honhai which many people know manufactures for Apple and many other companies. To provide a simple analogy, EMS is something which some technology companies do not want to deal with as many of these companies largely concentrate on the technology aspects, hence phasing out some of the work to specialised companies like Hon Hai (for Apple). Inari is such for a company called Avago.

Avago, a spin offs from the old HP company and is hugely successful in having a large penetration supplying power amplifier chips and other technologies to most of the smartphones and tablets companies. As smart phones' penetration continues to grow, Avago as expected flies. Similarly, Inari riding on that wave as a contract manufacturer for Avago is enjoying that as well to the extent that its share price becomes one of the most successful IPO of recent times.

Inari's price chart since IPO
I know that Inari is doing well. But I wanted to probe further as I also wanted to know is there any action taken to take advantage of the over-exuberance towards the company. While Avago and Inari are performing, it is a business which I am not able to gather my thoughts or foresee over the next 5 years for example. It is a business which is largely dependent on orders and contracts. Apple's iphone and ipad, and Samsung's Galaxy or HTC's line of products may be using Avago's technology now. This things, as we know can change, which is why over the longer term it is important for Inari to not be overly dependent on Avago although it has been a very good partner.

A look at its financials can be done to sometimes ascertain that.

Based on the above numbers, it is pretty solid with good revenue and PAT growth. Against its free cash flow however, Inari does not seem to be doing that strong. I can partly understand however as one will need to invest quite substantially for it to grow as a EMS player. This I believe is warranted.

PAT and GP margin for last 9 quarters

I would be a little bit careful of this numbers although it is a registered audited number. Looking further into its 2Q2013 quarterly announcement, I felt that its statement was too bullish. It mentioned that its margin improved substantially due to economies of scale as provided below.

Would Inari be a good buy for the future and how about Insas? As mentioned before, Insas has some intrinsic value where as a investment company, it is doing decently well. To how much would the shareholder be providing value to its investor, that very much remains to be seen.

Inari, on the other hand would still be very dependent on Avago while Avago would be dependent on its technology for the smart phones and tablet industries. That is a lot of "IFs" I would say and looking at its share price todate, if one is to still jump in - I just have too many questions still. It is now priced at close to Globetronics market capitalisation and how it achieved this is just too strong for a EMS player.

Nevertheless, if it is able to achieve that momentum, the current traded price is still attractive.


Winnfield said...

Kind of traded this stock in and out in the last two months. One thing that is worth paying attention is the contradicting pattern of insider buying/selling against the strong results.

If anyone has been watching, he would notice the aggressive paring down of stake by the insiders at valuation that is not exceedingly high. It is only about one week before the release of quarterly results that the managing director started to buy shares of his own company. This is counter logic. I could not fathom why would any investors want to sell shares in a company that seemingly has a growth curve ahead.

panaceaasia said...

There are many reasons for selling. A new house, car, children's education, etc. But there is one reason for buying.

To earn a profit or investment gain. No worries then. The directors of Boilermech sold at RM1.30-1.50. The share price is above RM2. They own million of shares. It is fine to sell a portion of their holdings.

ohm1 said...

Hi felicity, found your article from i3investor.. Based on 2Q13 results (25 feb) GP is 17.9m, so margin is 29%? Dis is same as 1q and 4q13 wor?

felicity said...

Thanks a lot ohm1. My mistake

Gark said...

Inari manufacture, assemble and test RF bar for Avago. Both Inari and Avago has a long history working together since the HP & Agilent days.

The RF bar is currently patented by Avago and it's unique design makes it being used in almost all smart phones.

Since this is a patented product, Avago is enjoying very good margins and some of these profits are passed down to Inari.

The recent jump in revenue and the erosion of margin is due to takeover of Amertron. Amertron have much higher revenues but a smaller 4% margin, hence is diluting the overall margin.

Investing in tech one has to be careful, you will never know if the next day some other person is going to invent a better & cheaper RF bar.

Best is to see Avago's performance as a proxy to Inari's.