Highlights

We met up with management post FY14 results and left with great optimism. Supported by insatiable global demand, Inari will be in multiyear capacity expansion mode following the recently announced land and factory acquisitions.

RF: order volume from Avago continues to grow steadily with visibility of 6 months ahead. In turn, RF sales is expected to be robust and forecasted to grow 30% and eventually account for 50% (FY14: 42.6%) of overall revenue in FY15. With its current utilization rate near to full capacity, this operation will be expanded with the newly acquired semi-equipped factory. Factory renovation will be carried out on a staggered basis over 2 phases. Phase 1 and 2 will begin in Sept 2014 and mid- 2015, respectively with both targeted to complete within 6 months renovation periods.

To maintain RF’s gross margin (highest among its product portfolio), it has embarked on several cost improvement measures, including using alternative material, invest in automation and reduce shipping cost.

Optoelectronics (Amertron): expecting a flat growth in FY15. However, it targets to improve its bottom line contribution by relentlessly extract synergies within the group and effectively manage the cost structures.

Electric Test and Measurement Equipment: maiden top line contribution of RM40m yielded <RM5m profitability in FY14. CEEDTec’s revenue is expected to grow 50% in FY15 and expand further reaching RM80-100m in FY16. To support its exponential growth, a building will be erected on the newly acquired Batu Kawan land, solely to house CEEDTec in FY16.

Fibre Optics (ISK): with Cisco’s prediction of global IP to deliver 13.8PB every 5 minutes in 2017, Inari is hopeful for an explosive growth in FY16. Demand will be mainly driven by the adoption of cloud and data centre.

FY15 CAPEX guidance: RM40m.

Forecasts

Unchanged.

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 shortage.

Rating

BUY, TP: RM3.41

Positives - Synergy from acquisition, 40% dividend payout providing reasonable yield and strong earnings growth.

Negatives – innovation stalemate in telecommunication.

Valuation

Reiterate BUY with unchanged fair value of RM3.41 based on 15.1x CY15 P/E.

Source: Hong Leong Investment Bank Research - 4 Sep 2014