Highlights

• Proposed bonus issue up to 1.0bn new ordinary shares on one-to-one basis with pending entitlement date. Shareholders and other relevant approvals are required.

• Left the briefing feeling neutral but saw great potentials in several key developments that would bring it to the next level.

• RF: After two consecutive quarterly growth, Inari guided for a rather flat 2QFY17 with stable loading. Capacity expansion was on track with testers increased to circa 700 as of Nov. It is embarking to add another 80 testers for new product through phase 2 expansion on P13 facility. Total CAPEX amounted to RM75m with RM35m for the extension and RM45m for machinery.

• ISL: Fiber chip fab and wafer cert has started contribution in 1QFY17 and full year revenue is estimated at RM60m.

• IIS: P21 phase 1 has commenced with mixed signal testing since Jul and total shipment has reached 9m units supported by 10 testers. Phase 2 is underway with target completion by Dec and with this, it will house a total of 58 testers. Total CAPEX is projected at RM160m with half to be reimbursed by MIDA under the one-to-one matching grant. This business is expected to generate RM60-80m revenue per annum.

• IOT: Also located in P21, Inari Optical Technology will be serving a Penang client focusing in unique infrared product. Production is planned to start in Jan 2017 with 5m units per month. CAPEX of RM50m is allocated and this business is expected to yield double-digit margin.

• PCL: While the investment yield generous dividends, Inari is constantly exploring new opportunities in China leveraging on PCL’s expertise in optoelectronics.

• In regards to US protectionism and TPPA abolishment, Inari opine that the business risk is rather low as the economic value of assembly is not justifiable.

Forecasts

• Unchanged.

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: RM2.86 ↔

• Largest OSAT in Malaysia specializing in communication and networking segments which are poised to grow further. Pick up in new businesses and successful turnaround in Amertron will be catalysts.

Valuation

• Reiterate HOLD call with unchanged TP of RM2.86, pegged to 15x of CY17 FD EPS.

Source: Hong Leong Investment Bank Research - 24 Nov 2016