Highlights

• Key takeaways reaffirmed our positive views on both Inari and its business outlook. Existing productions are well managed and continue to deliver while capacity expansion and new business are underway.

• RF: main growth driver for FY15-16. Backlog and new loading are sustaining capacity running at full steam as demand continues its momentum. Expansion at the newly acquired factory (P13) is expected to complete in 3 weeks and ready for qualification. This will add 100 test machines in P3’s Room 1 raising Inari’s total testers to 522. Subsequently, another 50 testers will be located in P13’s second floor Room 2 and should be ready by mid-March. P13’s Room 2 has been reserved for RF expansion in 2016.

• Amertron: although contribution was softer, transformation is on track to enhance its profitability. At Kunshan, Inari has successfully negotiated with Osram to share part of the costs as orders were lower-than-forecasted. As for the 2 plants in Philippines, Inari is improving their productivity by investing in automation. The Clark Field factory will also be expanded with additional 80k sqft by end of 2015 for new business venture.

• New business: Business Development team has been tasked to handle chip fabrication / wafer sorting. Inari has also hired 13 staffs to undergo trainings in US and Mexico in order to build such facility in P13’s Room 3. This will mainly focus on photonic ICs.

• CEEDTec: challenging as sourcing requires strong cash flow but expect to breakeven by FY15. Exploring ways to move away from low to high margin products, such as oscilloscope.

• FY15-16 CAPEX guidance: RM60m.

Forecasts

• Minor tweaks based on latest operational data, FY15-16 CAPEX guidance and to reflect the recently concluded right issue cum warrant exercise. In turn, this has led to higher FY15-17 PATAMI by 2.5%, 6.2% and 7.0%, respectively.

Catalysts

• Wireless communications / mobility / IoT (M2M) / LTE.

• Business diversifications into optoelectronics and T&M.

• Favorable FOREX.

• Continuous effective operational strategy.

Risks

• Major client risk (Avago) / high dependency.
• FOREX risks.
• Patent disputes.
• Resources / labour shortage.

Rating

BUY , TP: RM3.44 

Positives

• Appreciation of greenback, 40% dividend payoutproviding reasonable yield and strong earnings growth.

Negatives

• Innovation stalemate in telecommunication.

Valuation

• Reiterate BUY after raising TP by 13.5% from RM3.03 to RM3.44 as we rolled over our valuation to CY16 as well as reflecting the upward earnings revisions. Our fair value is pegged to unchanged P/E multiple of 15x.

Source: Hong Leong Investment Bank Research - 6 Feb 2015