Highlights

• We left the briefing feeling positive on its business outlook as well as expansionary business plans to outshine the growing semiconductor industry.

• After aiding the group to achieve historical high in terms of revenue and profit year after year, RF remains the chief growth driver with target of 30% yoy expansion in FY16.

• Management remains bullish on RF’s demand and sees great potential to capitalize on the LTE deployments in China, India, Middle East, Africa and Turkey.

• While RF’s output volume will not surge significantly, module complexity thanks to miniaturization has led to higher chip density/content which bode well for Inari.

• FY16 CAPEX is expected to reach RM110m which can be broken down into RM45m for machinery capacity expansion, RM20m for automation/improvement, RM10m for probers for wafer testing and RM35m for factory floor space expansion (P13 extension/lease/acquire).

• Shared that several sections in P13 are on track for transfer and qualification with expectations to start contribution to the group, including SMT and level 2 Room 1 Test in Jul 2015 as well as chip fab in Jan 2016.

• After ploughing much into fibre optic R&D, Inari believes that it is ripe for monetization. ISK has the competencies in product development, validation, manufacturing and testing. After inking a licensing agreement with Avago, it will extend its capability into sales and marketing for its products.

Forecasts

• Updated model based on latest guidance mainly on capacity, CAPEX and new FOREX assumption of RM3.80/USD. In turn, this has led to upward adjustments in FY16-17 FD EPS by 0.9% and 5.4%, 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: RM3.79

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 3.3% from RM3.67 to RM3.79 reflecting the upward earnings revisions.
• Our fair value is pegged to unchanged P/E multiple of 15x CY16 FD EPS, 10% premium to global peers’ average P/E which is justifiable given the stronger greenback and high growth ahead (see Figure #2).

Source: Hong Leong Investment Bank Research - 24 Aug 2015