Highlights

We left the analyst briefing with great optimism as its existing RF business remains robust underpinned by global proliferation of smart devices. Meanwhile, its fibre optics division, namely ISK, is poised for maiden contribution in 4QFY14 solidifying top line growth going forward.

RF: new plant 5 is running at near full capacity or utilization rate of 85% although it was expanded in Oct 2013. It is now evaluating several alternatives for the next phase of expansion, including using plant 5’s rooftop, acquiring new land beyond Penang Island in Batu Kawan or procuring a ready factory.

Optoelectronics (Amertron): experiencing strong demand from existing customers while profit margins improved from 4% to 7% thanks to enhanced production efficiency due to successful integration and optimization.

Electric Test and Measurement Equipment: commenced delivery of 5 new products to Agilent since Jan 2014. There are over 15 new products in the pipeline at final development stage to be introduced progressively to Agilent.

Fibre Optics: to be complementary to Avago’s recent acquisition of LSI Corporation who is a leader in enterprise storage market as fibre optics is the essential communication solution in server farm.

Continuous investment in R&D has positioned Inari Amertron as the leader in system in package (SiP), a hybrid technology consisting of flip-chip packaging, surface mount technology (SMT) and copper pillar bump with reducing thickness from 0.4mm to 0.3mm mold.

Added 98 to 424 test systems in the past 6 months and it is the nation’s largest test vendor.

Breakdown of revenue contributions by major customers: Avago (70%), Osram (20%) and Agilent (10%).

Envisions moving up the value chain transforming from an EMS (Electronics manufacturing services) to ODM (original design manufacturer) provider for more range of products in 2015. This would allow Inari Amertron to build a stronger branding and in turn, enhance profitability.

Forecasts

Unchanged.

Catalyst

• 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 shortage.

Rating

BUY, TP: RM3.09

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

Negatives – innovation stalemate in telecommunication.

Valuation

Reiterate BUY with unchanged fair value of RM3.09 based on unchanged 15.1x CY15 P/E or average P/E of its Malaysian and US-based peers (see Figure #2).

Source: Hong Leong Investment Bank Research - 19 May 2014