Highlights

• US tech stocks, including Avago (-6.5%) fell on Wednesday and sent Nasdaq to its biggest decline (-2.4%) in nearly a year. Inevitably, Inari also traded down by 5.0% yesterday, mirroring the faith of its major customer.

• We opine that this is another round of knee jerk reaction, similar to the overreaction in Oct 2014 which we called it bluff rightfully (refer to our Technology sector report titled ““Ctrl-AltDel” on Semiconductor?” dated 17 Oct 2014). Thus, we advise investors to take this opportunity to accumulate in view of the share price weakness.

• Our recent company meeting 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 businesses are underway.

• Expansion at the newly acquired factory (P13) is on track and expected to contribute in 4QFY15, an upside potential to our FY15 forecast. With this, RF capacity is estimated to be boosted by 30% in FY16.

• Although Amertron’s contribution was softer, transformation is on track to enhance its profitability. It continues to improve productivity at the 2 Philippines plants by investing in automation. The Clark Field factory will also be expanded with additional 80k sqft by end of 2015 for new business venture.

• Gathered from our recent E&E Technology forum, the industry is expected to expand healthily in FY15 (see Figure #1) with growth rate ranging 3% -12%, signaling another record year in the making.

• According to IDC’s March 2015 report, smartphone shipment volume reached 1.30bn units in FY14, representing a remarkable 27.7% yoy growth. By 2019, this is forecasted to reach 1.96bn units, a 5-year CAGR of 8.5%. This bodes perfectly well for Inari who has direct exposure to the smartphone market.

Forecasts

• Maintained.

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 payout providing reasonable yield and strong earnings growth.

Negatives

• I nnovation stalemate in telecommunication.

Valuation

• Reiterate BUY based on unchanged TP of RM3.44 pegged to multiple of 15x of CY16 EPS.

Source: Hong Leong Investment Bank Research - 27 Mar 2015