Highlights

• We left the briefing feeling neutral as management guided a less bullish growth for FY16 while various expansions are planned to defy the contractionary global market and the challenging operating environment.

• RF’s revenue contribution fell below 50% in 2QFY16 due to stock adjustment coupled with the expectation of slower growth in smartphone market, especially in China. While it remained high in Jan, Feb and Mar RF wafer loadings are expected to decline 20% mom. As such, P13B extension has been halted temporarily.

• Inari pins high hopes on gradual recovery by mid-year leveraging on inventory replenishment and introduction of new products earmarked for new smartphone launches towards the end of the year.

• After Foxconn acquired Avago’s optical module business, its fibre optic licensing strategy from Avago to address the tier-2 market has also been shelved due to cannibalization concern. In return, Inari secured at least a 2-year order contract.

• Showcased the layout design of the newly purchased factory in Bayan Lepas, Penang. Code-named P21, this 2-storey factory will house Inari Integrated Systems (IIS), responsible for complete test and product development. P21 is expected to be ready for machine installation by Apr and commence operation in Jun. Inari was mum on IIS’ financial contribution.

• The CK2 expansion at Clark Field factory is expected to be ready in Apr and commissioning is slated to start in Jun.

• Inari is positioning itself as one stop total turnkey high volume manufacturing and engineering services provider, from wafer level processing, packaging, testing, EMS(box-build) to HUBservices.

• To date, it has shipped 2bn or 30% of global RF SiP (MEMS) for smartphone and is the largest RF SiP Test -house.

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

HOLD , TP: RM3.57

Positives

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

Negatives

• Innovation stalemate in telecommunication.

Valuation

• Reiterate HOLD with unchanged TP of RM3.57, pegged to unchanged P/E multiple of 15x CY17 FD EPS.

Source: Hong Leong Investment Bank Research - 25 Feb 2016