Highlights

Although Inari’s share price has quadrupled astonishingly YTD, we believe that it is still undervalued as the market has yet to price in its forthcoming catalysts.

The Avago factor. Avago is a leading designer, developer and global supplier of broad range of analog, mixed signal and optoelectronics components and subsystems serving three primary markets, including wireless communications, wired infrastructure and industrial. Avago, who also owns 8.9% equity interest in Inari, outsources radio frequency (RF) IC wafer assembly and processing to Inari. This business contributed ~95% of Inari’s FY13 revenue and is poised to grow vigorously on the back of global LTE adoption and bullish phone shipment (see Figure #1 and #2).

Diversification into optoelectronics industry. The newly acquired Amertron will be fully consolidated in FY14 and is expected to be earnings accretive. Amertron produces optical transceiver modules, optical sensors and switches, LED displays and IC with Osram and Avago as main customers. According to OIDA (Optoelectronics Industry Development Association), the size of this sector is expected to soar reaching USD1.2tr in 2017 (see Figure #3) as its energy efficiency endorse wide applications such as smart devices, TV, image sensors, vision systems as well as its function as photovoltaic (solar) cells, a viable solution for renewable energy (environmental-friendly).

Synergistic partnership with Agilent. Inari’s 51%-owned Ceedtec is an original design manufacturer (ODM) and R&D house in the electronics industry with niches in design and manufacture of power supply and testing equipment. Notably, Ceedtec is a key eco-system partner for Agilent. By leveraging on Agilent well-established test and measurement (T&M) market and its role as electronics and electrical industry lead partner for ETP, Ceedtec is expected to grow rapidly with exposure to international markets.

Fibre optics as new venture. Started in Jul 2013, this would allow Inari to penetrate into Avago’s wired communication business segment focusing in product development such as transistors and connectors. The exponential growth of data traffic (see Figure #4) has sparked the migration from copper to fibre optics (see Figure #5) creating instantaneous overwhelmed demand.

Catalysts

Wireless communications / mobility / IoT (M2M) / LTE, business diversifications into optoelectronics and T&M, favorable FOREX, continuous effective operational strategy.

Risks

Single major client risk (Avago) / high dependency, FOREX risks, patent disputes, resources / labour.

Forecasts

Expecting existing business to grow circa 20% pa., while consolidating Amerton will add US$100m (RM300m) sales. At PAT margin of 11%, FY14 EPS would yield 14.2 sen.

Rating

NOT RATED, TP: RM1.90

Positives - Synergy from acquisition, 40% dividend payout at reasonable yield, listing transfer to Bursa Main Board.

Negatives – innovation stalemate in telecommunication.

Valuation

We value the stock with a fair value of RM1.90 based on 13.4x FY14 P/E multiple, average P/E multiple of its USbased peers (see Figure #6).

Source: Hong Leong Investment Bank Research - 25 Oct 2013