Inari  Ametron’s  (Inari)  share price went up by 15% since early June. We continue to like the stock as potential surprises in its upcoming 4QFY14 results  release  could  drive  near-term  sentiment  while  continued strength in Avago’s wireless division  may  help propel earnings growth over  the  medium  term.  Maintain  BUY,  with  our  FV  revised  up  to MYR3.82 (from MYR3.49), based on a 17.5x CY15 P/E.

4QFY14  results  preview.  Inari’s  FY14  numbers  could  potentially  beat our  full-year  forecast  of  MYR88.0m  due  to  pent-up  demand  for  its integrated  packaging  and  testing  services  (IPTS)  in  4QFY14.  This  is evident  in  Avago Technologies  Ltd’s  (Avago)  (AVGO  US,  NR)  latest quarterly  results,  which  saw  surging  demand  for  its  wireless  productsfrom  Asian  smartphone  original equipment manufacturers  (OEMs).  This will likely benefit Inari by virtue of being one of Avago’s three main radio frequency integrated circuits (RFICs) assembling and testing contractors.

Apple’s iPhone 6  to drive demand. We expect the positive momentum to persist in 1HFY15, with Apple (AAPL US, NR) set to launch its iPhone 6  and  iPad  Air  2  by  Sept/Oct  this  year.  Currently,  Avago  supplies  two chips  each  to  the  existing  iPhone  5S  and  iPad  Air.  Judging  from  the interests, we expect iPhone  6  to potentially become Apple’s best seller and  will  likely  beat  its  previous  sales  record  of  9m  iPhone  5Ssmartphones  sold  over  the  handsets'  first  weekend  of  sales  in  Sept 2013. This may pique investor interest in Inari, whom we see as the mostdirect proxy among local listed companies to the iPhone 6 theme.

Making  inroads  into  China.  Avago’s  power  amplifier  chip  module  is found to be in the recently-announced Xiaomi’s flagship Mi4 smartphone model.  Xiaomi shipped  26m smartphones  in  1HCY14  vis-à-vis  7.0m  in 1HCY13.  It  aims  to  boost  phone  shipments  to  100m  units  in  2015. Should this materialise, it will likely propel demand for Avago’s wireless products and hence benefitting Inari indirectly.

Forecast revision.  We revise up our FY14F earnings forecast by 8.3% to MYR96.1m in anticipation of Inari’s likely outperformance in 4QFY14 in  view  of  Avago’s  strong  showing  and  positive  quarterly  outlook guidance.  That  said,  we  make  no  changes  to  our  FY15F  and  FY16F forecasts  for  now,  with  our  full-year  core  earnings  estimates  largely unchanged at MYR129.9m and MYR152.5m respectively.

Looking Good Ahead
4QFY14 results preview.  Inari  is set to release its 4QFY14 results by end -August. Based on our channel checks, its FY14 numbers could potentially beat our current full-year forecast of MYR88.0m due to pent-up demand  for its integrated packaging and testing services (IPTS) in 4QFY14, driven primarily by its single largest customer Avago. This is evident in Avago’s latest quarterly results release whereby th e group registered  revenue  of  USD701m  (+25.0%  y-o-y)  and  core  earnings  of  USD223m (+45.8%  y-o-y),  driven  by  its  wireless  business  which  saw  surging  demand  fromAsian  smartphone  OEMs.  By  virtue  of  being  one  of  Avago’s  three  main  radio frequency integrated circuits  (RFICs)  assembling and testing contractors, we believe Inari would most likely benefit from Avago’s improved sales volume.

Apple’s  iPhone  6  to  drive  demand.  Moving  ahead,  we expect  the positive  sales momentum  to  persist  in  1HFY15,  with  Apple  set  to  launch  its  widely-anticipated iPhone  6  and iPad  Air 2  by Sept/Oct this year. Currently, Avago supplies two chips each  to  the  existing  iPhone  5S  and  iPad  Air.  According  to  a  consumer  survey conducted  by  www.techradar.com,  iPhone  6  is  the  most  anticipated  Apple’ssmartphone ever, with interest easily outstripping that of  its predecessors  iPhone  5Sand  iPhone  5.  Judging  from  the  interests,  we  expect  the  iPhone  6  to  potentially become Apple’s best seller and will likely beat its previous sales record of  9m iPhone 5S  smartphones  sold  over  the  handsets'  first  weekend  of  sales  in  Sept  2013. Ultimately,  this  may  pique investor interest in Inari,  whom we see as the most direct proxy among local listed companies to the iPhone 6 theme.

Making inroads into China. On a side note, Avago’s power amplifier chip module isfound  to  be  in  the  recently-announced  Xiaomi’s  flagship  Mi4  smartphone  model.Xiaomi  shipped 26m  smartphones in 1HCY14 vis-à-vis 7.0m in 1HCY13.  It has  set a target to boost phone shipments to 100m units in 2015 as t he company  diversifies into new markets such as India, Brazil and Russia after outselling Apple in   its home market of China.  Taking into account the Mi4’s attractive price point of approximately MYR1,000-1,050 per unit, we are of the view that the fast-rising Chinese smartphone maker’s mass market price offering would likely be a big hit. Should this materialise, it will  likely  propel  demand  for Avago’s  wireless products  and  hence  benefitting  Inari indirectly.

Business  as  usual  for  Armetron.  As for its optoelectronics arm  parked under  its 100%-owned  subsidiary Amertron Global, we continue to expect growth to be largely stable  at  mid-single  digits  given  the  relatively  stable  demand  for  these  products,
which  are  used  in  data  centres  as  well  as  the  aerospace,  defence,  industrial automation and automotive industries.  Management’s near-term focus in our view would  be  to  improve  production  workflow  and  operational  efficiency  at  its
manufacturing  plants in China and  the  Philippines in order to  boost  profitability. We expect its segmental net margins to improve gradually to 7-9% by FY16 from 4-6% currently on more stringent cost control as well as improved technical productivity.
Ceedtec  to  pick  up  momentum  in  FY15.  We  believe  Inari’s  electronics  test  and measurement  (ETM)  division,  via  its  51%-owned  Ceedtec,  may  start  churning  in positive  earnings  accretion  in  FY15.  Incubated  to  become  an  original  design
manufacturer  (ODM)  for  Agilent  Technologies  (A  US,  NR),  we  expect  Ceedtec’s financials to pick up substantially over the next two years  and potentially contribute 5-10%  of  the  group’s  bottomline  for  FY15F-16F.  Meanwhile,  we  do  not  discount  the possibility of a potential spinoff of the unit over the next 2-3 years as we understand that ETM is a highly capital-intensive business and  listing the unit separately would provide access to the equity capital market.

Rights to be completed by end-3QCY14.  Recall that Inari has proposed a 1-for-8 rights issue at an indicative price of MYR1.50  in early  July.  The exercise would raise some  MYR100m  in  net  proceeds  and  is  expected  to  be  completed  by  as  soon  as
end-3QCY14.  Management guided that  some MYR60m of  the proceeds raised will be used to  purchase a  new  plant as well as  for procurement of  new equipment  to expand its IPTS division. We deem this a plausible move in view of rising demand for
Avago’s wireless products. Hence, we  continue to  advise investors  to subscribe for the  rights  shares  as  we  believe  the  exercise  would  help  to  fund  its  capacity expansion to propel earnings growth in the long run.
Forecast  revision.  We  revise  up  our  FY14F  earnings  forecast  by  8.3%  to MYR96.1m  in  anticipation  of  Inari’s  likely  outperformance  in  4QFY14,  bolstered  by Avago’s strong showing  and positive quarterly outlook guidance. That said, we make
no  changes  to  our  FY15F  and  FY16F  forecasts  for  now,  with  our  full-year  core earnings estimates largely unchanged at MYR129.9m and MYR152.5m respectively.Maintain  BUY.  Inari’s  share  price  has  gone  up  by  15%  since  early  June.  We
continue  to  like  the  stock  as  potential  surprises  in  its  upcoming  4QFY14  results release could drive near-term sentiment while continued strength in Avago’s   wireless division  may  help propel earnings growth over the medium term.  With that, we are maintaining our BUY call. On our valuation per se, we are bumping up our FY15 P/E to 17.5x (from 16.0x) to be on parity with Globetronics Technology (GTB MK, NR), which we deem the closest proxy to Inari, as both focus on the higher-end and hence
better-yielding  semiconductor  component  segment.  This  translates  into  a  30% premium  over  its  peers  such  as  Malaysian  Pacific  Industries  (MPI  MK,  BUY,  FV:MYR6.23) and Unisem (UNI MK, BUY, FV:  MYR2.16), which we deem justified given Inari’s:  i)  relatively  stable  earnings  track  record,  ii)  established  partnership  with Avago,  and  iii)  better  earnings  visibility  as  well  as  growth  prospects.  With  that,  we arrive at a higher FV of  MYR3.82, or MYR3.46 upon completion of its rights exercise (from MYR3.49).

Source: RHB