Raising the Bar

Inari continues to be our preferred OSAT play for its solid expansion and execution of strategies. Strong and growing demand for premium RF filters has helped fuel most of Inari’s growth but new drivers (IRIS IR chips and its data server segment) will help propel a 3-year forward CAGR of 35%. Maintain BUY with a higher target price of RM4.28.

RF Expansion Faster Than Expected

Inari’s RF testers have grown to 960 units currently (750 testers at end FY17) and are projected to reach 1,000 units by end Dec-17. This has already far exceeded our FY18-20E assumptions; we had only modelled for RF testers to hit the 1,000 mark by FY20E. We believe that the complexity of the RF filters and 4G penetration remain the key drivers. We think 5G migration will provide an additional round of earnings catalysts.

IRIS IR and Data Server Business Contributing Nicely

While the IRIS IR business saw a stronger contribution in 1QFY18, there was some volume weakness in the early part of 2QFY18. We understand that volumes have picked up again and will run close to 10m units in December (from 5m units in September on enlarged capacity). Separately, the data server chip business has finally turned around. Currently running at 42 testers, this is set to grow to 52 by year end.

Further Capacity Expansion - Higher Capex of Up to RM180m for FY18

Inari is setting aside capex of up to RM180m for FY18 for the expansion of its RF (plant P13b to accommodate this with additional 120k sf) and its data server chip segment. Included also is capex for new product development for a German customer.

Maintain BUY and Higher TP of RM4.28

We raise only our FY19-20E earnings assumptions given the higher RF tester capacity. We are increasing our TP to RM4.28 from RM3.00 after applying a 20x PE (unchanged) on FY19E EPS (previously CY18E EPS). We maintain our BUY rating based on its strong growth prospects (3-year net profit CAGR of 35%) underpinned by solid demand for premium RF filters and additional key growth drivers including the IRIS IR and data server segments. Key downside risks: a slowdown in global demand for smart devices, rapid ASP erosion, loss of its customer base and the introduction of new technologies that may render Inari’s products obsolete.

Source: Affin Hwang Research - 4 Dec 2017