Highlights

• Briefing was concluded satisfactorily with positive key inputs focusing on strategic business expansion plans in effort to defy the contractionary global market and the challenging operating environment.

• Proposed bonus issue up to 206.1m new shares on the basis of 1 for every 4 existing Inari shares. EGM to be convened for approval and entitlement date to be determined later.

• Begin to see gradual increase in wafer shipment in 2QFY16 and expect full loading in 2H16 as Avago completes foundry capacity expansion.

• Equipped with 609 RF testers as of Oct 2015, up from 522 last year. This figure is expected to top 800 by Oct 2016 in tandem with the increasing load from Avago.

• RF’s FY16 contribution is forecasted to be record high at circa RM600m while Chipfab to chip in another RM60m in CY16.

• RM100m is earmarked as FY16 CAPEX which can be broken down into RM42m for machinery capacity expansion, RM15m for automation/improvement, RM8m for R&D and RM35m for P13B expansion.

• Showcased the conceptual design of Batu Kawan factory. It will be a 5-storey premise yielding a total floor space of 54.8k sqm. Initial plan is to house two new businesses should they materialize.

• 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

• 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: RM4.41

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 16.4% from RM3.79 to RM4.41 as we roll forward out valuation to CY17.
• Our fair value is pegged to unchanged P/E multiple of 15x CY17 FD EPS, 8% 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 - 16 Nov 2015