Highlights

• Acquired 5m shares or 9.7% equity interest in PCL via DBT through Taiwan Stock Exchange for a total consideration of TWD355.0m (RM44.5m) or TWD71.0 per share, representing a premium of 8.4% above the closing price of TWD65.5 as at 7 March 2016.

• Entered into a MOU with PCL with the intention to set up a JV in China for purposes of providing outsourced semiconductor assembly and test (OSAT) services to major Chinese clients, with particular focus on front-end OSAT services, with the common vision to list the JV in China within 5 years.

• The JV shall be owned 50:50 by Inari and PCL.

• Upon satisfactory due diligence audit by PCL, Inari will inject its 100%-owned Amertron Technology (Kunshan) Co Limited (ATK) into the JV on a net book value basis.

• Both parties agreed that the initial capitalization of the JV shall be USD20.0m (RM82m).

• Inari opines that this is an investment opportunity into a firm whose core businesses are complementary, profitable, well run and has a significant presence in China. The MOU will foster business relationship and enable Inari to diversify and increase its income stream. Financial Impact

• The transaction price implied a valuation of 14.6x FY15E PE and 2.7x FY15E PB, slightly higher than compared to other Taiwanese peers (see Figure #2). However, this may deem fair ascribing a small premium for JV opportunity and market access.

• The whole deal amounted to RM85.5m (excluding injection of ATK) can be easily funded by its cash pile of RM139.2m as of 31 Dec 2015.

Comments

• We are positive on this development as Inari strives to improve ATK’s profitability since the merger in 2014. The JV may allow Inari to leverage of PCL’s experience in China as well as expertise in telecommunication markets.

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 - 9 Mar 2016