• According to Malay Mail Online, Broadcom has launched its new RM59mil global distribution warehouse in Batu Kawan, Penang. Minister of International Trade and Industry Datuk Seri Mustapa Mohamed was quoted as saying that the new facility will act as the central storage for inventories manufactured in the US, Taiwan, South Korea, Thailand and Malaysia, before the products are distributed worldwide.

• This bodes well for the local electrical and electronic (E&E) supply chain, including Inari Amertron (Inari). Having a global distribution hub set up in Malaysia means that Broadcom may direct more jobs to the local semiconductor players due to better logistics. We understand that this is part of Broadcom's plan to gradually shift operations from Singapore to Malaysia due to cost effectiveness.

• In addition, New Straits Times reported that Broadcom is planning to spend RM4.1bil on expanding its operations in Malaysia over the next 10 years, particularly investing in global production planning, quality management, strategic procurement and logistics management. We believe this may create more business opportunities such as assembly jobs for Inari going forward. However, we cannot quantify the positive impact as of now.

• On another note, we expect Inari to register exceptionally strong growth over the next two quarters in conjunction with the recent launch of several flagship smartphone models. Judging from the sales response of the previous model, we believe customers had deferred spending in anticipation of the upcoming "anniversary phone". We believe sales response in the first quarter of the new smartphone's release could resemble the phenomenon in 2015 when the smartphone maker released a big-screen model, which saw a huge bump in unit sales (45% YoY).

• Inari is now looking to proceed with the second phase of extension at its P13 plant, which will expand floor capacity by 120,000 sq ft. The extended building is estimated to cost RM10mil and take 6-7 months to complete (1-2 months for planning and approval; 4-5 months for construction). The additional floor space is needed to prepare for the group for potential pent-up demand for the new smartphone model.

• The group's Inari Optical Technology (IOT) division, which produces iris-scanning components, is currently running at 4mil units (KKu) per month. Inari plans to double the division's capacity from its current 5KKu/month by the end of 1QFY18 and expand by an additional 6KKu/month in 3QFY18. We estimate that this would contribute ~10% of FY18F revenue.

• We continue to like Inari because of: 1) higher expected RF orders from the recent launch of several flagship smartphone models; 2) rising adoption of iris-recognition technology; and 3) capacity expansion in P13 plant to prepare the group for more jobs.

• However, while prospects remain bright for Inari, we are keeping our HOLD recommendation as valuations appear uncompelling. Inari currently trades at a CY18F PE of 22x, 2SD above its historical average.

Source: AmInvest Research - 20 Sept 2017