Tech heavy Nasdaq Composite took a beating last Friday when Goldman Sachs and UBS suggested that tech stocks are potentially overheated.

The scepter of a bubble being suggested also sparked a comparison of valuation between today’s soaring tech stocks versus that in 1999’s dot-com bubble. But the case is different this time round, the top tech stocks today – also known as – FAAMG (Facebook, Apple, Amazon, Microsoft and Google) are dowdy monopolies generating vast amount of positive free cash flow while their revenue and earnings grow at double digits.

That said, stocks in Nasdaq are not exactly going cheap, so we looked to Malaysia-listed Inari Amertron again.

Investment Moats

In the past five years, shares of Inari Amertron have surged multi-folds from RM0.09 to RM2.05 today, after adjusting for stock splits. The jump represents a  2277.8 percent increase in stock price!

We only identified Inari Amertron in February 2017 when the shares were trading at about RM1.83. Although the consensus target price back then was RM1.87, its shares have rallied further by another 12 percent to today’s RM2.05.

In our last article, Shares Investment estimated that Inari Amertron has a strong market position in the Electronic Manufacturing Services (EMS) industry, commanding about 5.3 percent of global market share in 2016. The EMS industry was estimated to be a US$430 billion industry in 2015 and expected to grow to US$580 billion by 2020 – approximately at a compounded annual growth rate of 6.2 percent. In addition, growing radio frequency content growth per smartphone is also one of Inari Amertron’s potential growth driver.

Latest Financial Results

In its latest financial result, 9M17, Inari Amertron generated revenue of RM830.7 million surpassing that of the previous year by 5.7 percent on higher demand for the company’s products. The bottom line was further lifted by higher other operating income of RM44.8 million (9M16: RM10.9 million). Correspondingly, Inari Amertron’s net profit grew 49.7 percent higher over the past year to RM162.2 million.

On the cash flow front, Inari Amertron managed to produce higher free cash flow of RM128.2 million compared to RM6.2 million in 9M16. This was despite the fact that cash spent on capital expenditure was about the same at RM70.4 million.

The net cash inflow for the period further strengthened the company’s financial position. Inari Amertron’s cash position rose from RM248.8 million in 9M16 to RM380.9 million as at the end of 9M17. Meanwhile, total debt was pared down from RM80.4 million to RM48.4 million, as the company improved its total debt-to-equity ratio from 12.4 percent to 5.8 percent. Concurrently, Inari Amertron’s net cash position was also boosted from RM168.4 million in 9M16 to RM332.5 million in 9M17.

Undemanding Valuation


At the share price of RM2.05, Inari Amertron is changing hands at about 20.3 times price-to-earnings (P/E), lower than its peers average of 30.9 times. The counter is also trading at a lower P/E than the 24.1 times in February, while at the same time, return-on-common equity improved from 23.1 percent to 27.2 percent.

We look to another financial metric to determine if Inari Amertron is indeed undervalued. Earnings-per-share (EPS) grew from RM0.057 in 9M16 to RM0.084 in 9M17. Correspondingly, EPS growth for the past year was about 47.4 percent.  At the current P/E of 20.3 times, Inari Amertron would register a price-to-earnings growth (PEG) of 0.43 times only.

As such, given its track record of earnings growth, robust balance sheet, and undemanding valuation we think Inari Amertron allows investors to tap on the potential tech supercycle. If not, we think this counter also provides a good margin of safety, in case the bubbling narrative comes true.

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