Highlights

• The briefing was concluded satisfactorily and we continue to like its expansionary business plans to outshine the growing semiconductor industry.

• RF: the flattish 3QFY15 was due to order shortage from Avago who is currently expanding their wafer capacity. 4QFY15 order is likely to be at the same level with the hope that Avago may resolve its capacity constraint earliest by June 2015. This is not an issue for Inari as P13 is fully equipped with ready capacity. P13’s level 2 with 27k sqft will house additional 364 test systems bringing the total to 830.

• A 6-story premise (inclusive of 2-story carpark) to be erected next to P13 equivalent to 222k sqft to cater for 3 expansion projects, namely (1) RF NDI prober turnkey; (2) wafer sort extension (phase 2); and (3) assembly PAD (EMI) program. Total investment is estimated at RM53m. However, for phase 1, only 4 stories will be built starting from Sept 2015 for RM26m and expected to complete within 9 months.

• Amertron: although it has yet to achieve its net margin target of 10%, transformation is on track through automation and workforce rationalization. The Clark Field factory will also be expanded with additional 90k sqft by end of 2015 for fibre optics business, as part of ISK expansion with USD5.2m investment. This additional space is able to bring total production lines up to 3 where at full capacity, they are expected to generate RM90m revenue.

• Chipfab: 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.

Forecasts

• Updated model based on latest guidance and expansion roadmap. In turn, this has led to adjustments in FY15-17 FD EPS by -1.6%, 6.0% 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: RM3.67

Positives

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

Negatives

• Innovation stalemate in telecommunication.

Valuation

• Reiterate BUY after raising TP by 6.7% from RM3.44 to RM3.67 reflecting the upward earnings revisions. Our fair value is pegged to unchanged P/E multiple of 15x CY16 FD EPS, matching its global peers’ average P/E (see Figure #2).

Source: Hong Leong Investment Bank Research - 18 May 2015