In an announcement last night, Inari said that it was entering into a JV with PCL Technologies in Malaysia for the purpose to secure, manage and manufacture optical transceivers and other related products. The JV will have an initial capitalization of up to RM21m (USD5m) which will be subscribed for in cash by Inari and PCL in the ratio of 30:70. All in, we are positive on this JV as it would immediately help to fill the floorspace at P34 and possibly lead to a gradual transfer of optical transceiver products from PCL’s current factory. Reaffirm our BUY call with a 12-month TP of RM1.79.

Gradually Filling P34

We are not entirely surprised by this announcement as management had guided that they would be filling empty capacity at Plant P34, which offers some 600k sf of floorspace. The JV partner is also not new, as Inari had previously owned a 9.7% stake in PCL, when it acquired the stake back in 2016. It had subsequently sold down that position although judging from this JV, the business relationship which never materialised back then, seemed to have blossomed nevertheless. We understand that the JV will eventually take up 100k sf of floorspace at P34.

Commercial Production Could be Quite Immediate

As PCLs optical products are already on the market and data centre related, we are of the view that the product transfer and actual commencement of commercial production should be fairly quick. Based on the announcement, PCL recorded a 1H19 revenue of TWD1181m (~RM158m) and profit of TWD129m (~RM17m). Note that we have yet to incorporate any contribution from P34 into our forecasts.

Reaffirm BUY and Target Price of RM1.79

While near term profit contribution from this JV may not seem meaningful to Inari, we think that this could potentially be the first of many other opportunities that could land on Inari. We suspect that the impact of the trade tensions could be a motive behind this partnership and, hence believe that there could be greater outsourcing opportunities, especially for well established and well managed OSATs such as Inari. Maintain our BUY rating and 12-month TP of RM1.79 (based on a target PE multiple of 20x on CY2020E EPS).

Source: Affin Hwang Research - 12 Sept 2019