Since time immemorial, history has shown that technology has been the engine to the prosperity of human civilisation. Then, in this modern era, semiconductors would have been the tools that have made mobile and digital technology possible. Undeniably, investing in semiconductor companies should become increasingly more relevant to both capital growth seekers and value investors.
Across the straits and listed on the Mainboard of Bursa Malaysia, Inari Amertron (Amertron) is one such company catering a range of manufacturing services for semiconductor products. Specifically, the company endeavours mainly on electronic manufacturing services (EMS) to the radio frequency mobile industry, as well as involving in optoelectronics manufacturing. In a gist, the company provides an assembly platform for back-end semiconductor packaging, which mainly comprises of back-end wafer processing, package assembly and radio frequency final testing.
Since its initial public offering (IPO) in July 2011, shares of Amertron have gained 1016.7 percent to RM1.83 per share as at 8 February 2017. While such spectacular share price movement had slipped right under our noses, we took a closer look at Amertron to see if the current share price allows for further upside gains.
Strong Industry Tailwind And Market Position
The proliferation of mobile and data tech is evident in our very own daily lives. And as we know it, this impact is likely to continue rising judging from the direction the tech industry is going. Naturally, in the macro prospect, this bodes well for Amertron should it be able to capture more of this big and growing pie.
According to the “Worldwide Electronics Manufacturing Services (EMS) Market 2016”, the total electronics assembly value in 2015 stood at a whopping US$1.3 trillion. This market value is expected to grow to US$1.6 trillion by 2020, partly spurred by demand for EMS. Value in the EMS sub-segment is conjunctionally expected to grow at 6.2 percent compounded annual growth rate (CAGR), from US$430 billion to US$580 billion during the same period.
Based on Amertron’s latest full year result of FY16, revenue generated was to the equivalent of about US$259.1 million. Of the total revenue, US$244 million was attributed to its EMS business segment. Comparing to Worldwide Electronics EMS Market 2016 estimates, Amertron’s EMS business alone can be estimated to account for about 5.3 percent of the world’s EMS demand in 2016!
Although this may be a simple extrapolation, we can draw inference that Amertron has attained a somewhat respectable size of market share. Meanwhile, Amertron’s EMS revenue growth of 6.4 percent in FY16 also surpasses the 6.2 percent CAGR estimate of worldwide EMS value (for 2015 to 2020). This further indicated to us rather positively of Amertron’s potential to chomp up more market share. In fact, it is noteworthy to mention that Broadcom, one of the world’s largest semiconductor giant (market capitalisation of approximately US$81 billion), is a key and long-term customer of Amertron.
Beneficiary Of Stronger US Dollar
While Amertron’s functional currency is in Malaysian ringgit, the company maintains a foreign denominated bank account predominantly in US dollar in order to facilitate the deposits, revenue as well as purchases denominated in the Greenback. This provides the company a natural hedge against adverse foreign exchange fluctuations.
At the same time, most of Amertron’s sales, but only about 50 percent of its expenses, are priced in US dollar. This makes Amertron a net beneficiary of any appreciation of the US dollar against the Malaysian ringgit. Based on Amertron’s sensitivity analysis, a one percent depreciation of the ringgit against the US dollar at the end of FY16 would have increased the company’s net profit by a further of RM1.2 million.
Going forward, with the US Federal Reserve posturing a rather hawkish stance on interest rates, it might suffice to make the conjecture that the ringgit will remain depressed or even drift lower against the dollar; to the benefit of Amertron.
Robust Financial Performance
Since IPO in 2011, Amertron’s top line exploded at a CAGR of 49.4 percent, from merely RM140.2 million to RM1 billion by FY16. Both gross and net profits were also on the uptrend, growing at an average of 123.3 percent and 99.6 percent per annum respectively over the same period.
At the same time, the company was also able to pare down on its debt level significantly. Amertron’s debt level peaked at RM107.7 million in FY15, but that has come down to just RM54.5 million in the last reported quarter in 1Q17.
Correspondingly, the company’s latest balance sheet has a total debt to equity ratio of merely 7.6 percent.
On the cash flow front, cash from operations has always been positive and growing. Growing at an impressive CAGR of 52.2 percent, cash from operations rose from RM20.9 million in FY11 to RM170.4 million in FY16. As a result, cash holdings increased from RM22.6 million in FY11 to RM212.4 million by end of FY16.
Furthermore, in its latest 1Q17 result, financial performance has also eclipsed that of the preceding financial year. Revenue grew by 2.4 percent to RM281.6 million, while net profit was 5.5 percent higher at RM48 million. Coupled with another bout of positive RM82.6 million cash from operations, cash holdings piled up to RM286.9 million.
Owing to its huge cash pile, Amertron’s balance sheet was highly liquid with a current ratio of 3.1 times. It is also becoming evident that the company is increasingly capable of funding its own capital expenditure through its cash-generating ability. Concurrently, the company also has a net cash position against total liabilities of RM246.1m in its last reported quarter.
Valuation Against Peers
Based on share price of RM1.83 per share, Amertron is trading around a trailing twelve-month price-to-earnings multiple (TTM P/E) of 24.1 times.
Comparatively, Amertron’s local peers listed in Malaysia trades between TTM P/E of 11.4 times to 35.2 times, and averaging to about 19.1 times. Compared to its peers’ average, Amertron seems to be trading at a higher valuation.
However, investors should also take note that Amertron’s TTM return on equity (ROE) at 23.1 percent, is also almost double that to the peers’ average of 14.1 percent. Hence, investors should not immediately conclude that Amertron’s current valuation to be overpriced, as its share-price performance was largely warranted.
Despite that, while we feel Amertron is undoubtedly a quality company to look at, the market seems to have already priced Amertron at a fair value. The consensus target price for Amertron is going at RM1.87 per share hence investing in Amertron now seems rather risky as investors will be looking only at a 2.2 percent potential upside. Nonetheless, investors should keep Amertron in their stock-watch, and be ready to make the jump should opportunity arises.