INVESTMENT HIGHLIGHTS

• No immediate business risk in relocation of assembly process

• P21-plant progress is on track

• Aggregate capital spending of up to RM200m allocated for FY17 and FY18

• Maintain BUY with an unchanged target price of RM4.32

Assembly industry outlook. There could be a disruption within the semiconductor’s supply chain due to the possible relocation of offshore production into the U.S. However, management is of the view that the risk of assembly operations being relocated is minute at this juncture. It would be a costly exercise as labour costs will increase significantly. In addition, the assembly process provides smaller margin which is usually in the mid-teens. As such, initial focus could be to relocate high-value added services which provide much better profit margin.

P21-plant progress on track. The group’s latest plant expansion, P21, will house Inari Integrated system Sdn Bhd (IIS) and Inari Optical Technology Sdn Bhd (IOT). IIS is the new testing division which will initially have 58 testers for the testing of IC chips. Meanwhile, IOT involves the manufacturing, assembling and testing of optoelectronics and sensor components, modules and systems. All in, utilisation rate for P21 could reach as high as 50% towards the end of CY2017.

Capital expenditure (capex). Management guided that capex for FY17 and FY18 would sum up to approximately RM200m. The bulk of the capex will be mainly allocated for the expansion of the radio frequency (RF) segment. We understand that part of the capex will be funded through the matching grant from Malaysian Investment Development Authority (MIDA). This will also help to ensure that Inari will maintain its dividend commitment.

Maintain BUY. Inari’s strategic positioning within the semiconductor value chain has proven to be in favour of the group. The group’s various core business segments have been recording better financial performance. Coupled with financial advantages from MIDA, the group has a healthy net cash flow which would be used for business expansion and for rewarding existing shareholders. All factors considered, we maintain our BUY recommendation on the stock.

Source: MIDF Research - 25 Nov 2016