Highlights

• Overall briefing takeaway was rather neutral. Existing RF and optoelectronics are flattish while two new businesses, namely mixed signal testing and infrared LED, are not ramped up as rapid as initially planned.
• RF: After two consecutive quarterly growth, revenue declined although US$ strengthened 7.2% qoq (2QFY17: RM4.34/US$ vs. 1QFY17: RM4.05/S$). RF contribution is expected to be stagnant supported by more than 680 testers. Expanded P13 to house additional 80 testers which targeted to complete by 4QFY17. To cater for new wafer dimension, P5 now has more than 100 flip-chip tape and reel machines.
• Amertron/optoelectronics: Saw a seasonal drop during the quarter and expected to be unexciting despite favorable FOREX. Turnaround may take longer than initially anticipated.
• IIS/mixed signal testing: Situated in P21, phase 1 is in operation with 15 testers and advancing into phase 2 with a target to reach a total of 30 testers by Jun 17. Due to the severe depreciation of RM, total number of testers for this project has been cut from 58 to 47. Alternatively, Inari was also requested by client to source those testers locally, leading to some implementation delays. Till now, MIDA grant has not been matched yet.
• IOT/infrared LED: Also located in P21, production line has been qualified and planned to reach mass production volume (MPV) in Feb 17. It is expected to operate at full capacity of 5m units per month in Mar 17. At the meantime, Inari is extending floor space to double the capacity and has a final capacity target of 20m units per month.
• Did not rule out the possibility of M&A, even going upstream such as material or substrate.

Forecasts

• Tweak sales forecast based on latest guidance and progress update. In turn, our FY17-19 PATAMI forecasts are raised by 3.1%, 14.6% and 22.1%, 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

HOLD ↔, TP: RM1.70 ↑

• 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 after raising our TP by 19% from RM1.43 to RM1.70, reflecting our earnings revision and rolled forward valuation. Our fair value is pegged to 15x of CY18 FD EPS.

Source: Hong Leong Investment Bank Research - 27 Feb 2017