Inari Amertron has proposed a 1-for-8 rights issue at an indicative price of MYR1.50. The rights shares will come with free warrants at a 1:1 ratio at  a  MYR2.00  exercise price. We advise investors to subscribe for the rights  shares  as  we  believe  the  proceeds  raised  (estimated  at >MYR100m)  will likely be used to expand its core businesses  to propel earnings growth  in the long run.  Hence, we maintain  BUY, with our FV still at MYR3.49 (or MYR3.16 ex-rights).

• Salient  details.  The  rights  price  of  MYR1.50  represents  a  discount  of 49.1%  to  its  theoretical  ex-rights  price  of  MYR2.95,  based  on  its  last closing. At its existing share base of 534.8m shares, we estimate that the rights issuance could raise MYR100.3m.
• Utilisation of proceeds.  Management highlighted that some MYR60mof  the  proceeds  raised  will  be  used  to  expand  its  existing  businesses, which  would  involve  setting  up  new  plants  as  well  as  procuring  new equipment.  This,  in  our  view,  would  most  likely  cater  for  future  growth opportunities  within  its  radio  frequency  integrated  circuits  segment,  as we  have  highlighted  previously  that  existing  capacity  is  almost  fully occupied at an average utilisation rate of over 85%.
• In-the-money warrants.  The  indicative  exercise price of the warrants  at MYR2.00  implies  a discount of  32.2%  over Inari  Amertron’s theoretical ex-rights price of MYR2.95. This,  in our view,  would entice investors to subscribe for the rights as the warrants will be issued deep in the money.On a side note, its major shareholder Insas (INS MK, NR)  has agreed to subscribe  for  its  entitlements  of  the  rights  shares  in  full  via  Insas Technology and Insas Plaza SB.
• Maintain  BUY.  We  believe  the  cash  call  would  help  to  expand  Inari Amertron’s  core  businesses  to  propel  earnings  growth  going  forward, and  advise investors to subscribe  for  the  rights  shares.  Maintain  BUY, with our fully-diluted FV unchanged at MYR3.49 (16x CY15F P/E). Upon completion  of  the  proposed  rights  issue,  our  ex-rights  FV  would  be adjusted to MYR3.16.  While  this may appear to offer limited upside fornow,  we  will  revisit  our model  upon management’s  confirmation  of  the potential earnings accretion from its new expansion opportunities ahead.

Source: RHB