nari looks set to further grow its RF division in tandem with Avago’s expansion as we step into 2016. This would continue to propel its earnings momentum for FY17-18. Maintain BUY with our TP upgraded to MYR5.00 (from MYR4.55, 13% upside) following our earnings revision that takes into account our latest USD/MYR assumptions.

Capacity expansion. Inari Amertron (Inari) currently houses over 600 testers under its radio frequency (RF) division. Management is looking to ramp this up progressively to 800 units by Oct 2016 to be in line with Avago Technologies’ (Avago) (AVGO US, NR) volume requirements. We expect the machines to be installed in stages in its P13 plant with full volume loadings by 4Q16. We are forecasting for topline contributionfrom its RF division to grow at 48%/26%/3% for FY16F/FY17F/FY18F.

Capex allocation of MYR100m. We expect the group to incur capex of MYR100m pa for FY16-FY17 taking into account the potential extension of its P13 plant (completion by 4Q16) and its proposed Batu Kawan site(ready by 2H17). We expect this to be funded internally, with its net cash closing at MYR205.6m as at Sep 2015.

Forecasts and risks. We upgrade our FY16F-18F EPS by 6.9-13.3% as we factor in our revised USD/MYR assumptions of MYR4.34 going forward (from MYR4.10-4.20). Key risks include: i) potential hike inminimum wage for workers, ii) customer concentration risk as we expect over 55% of its FY16 revenue to come from Avago, and iii) fluctuation in earnings amidst the current USD/MYR volatility, given that all of its revenue and 70% of its production costs are denominated in USD.

Maintain BUY. Following our earnings revision, we upgrade our SOPbased TP to MYR5.00 based on an unchanged 18x 2016F P/E. Its proposed 1-for-4 bonus issue would go ex on 4 Jan 2016, upon which our TP would be adjusted accordingly to MYR4.00. We used DCF (based on WACC of 8.8% and terminal growth rate of 1.7%) as a corroborative methodology and deriving a fair value of MYR4.69 which we deem reasonably close to our revised TP. All in, we maintain our BUY call as we advise investors to ride on the earnings accretion from the favourable forex environment as well as its ongoing RF capacity expansion as we step into 2016.

DCF valuation. Under our corroborative DCF valuation, we assume annual capex allocation of MYR100m for FY16 and FY17 before tapering off to MYR60m pa taking into account the potential extension of its P13 plant (completion by 4Q16) and its proposed Batu Kawan site (ready by 2H17). We peg a terminal growth rate of 1.7%, which we deem reasonable as we expect Inari to benefit in the long run from more outsourcing opportunities from Avago’s series of acquisitions over the past 18-24 months outside the RF space. The derived equity value of MYR3.70bn translates into 16.8x 2016F P/E, which we deem to be reasonably close to our target multiple of 18.0x.

Source: RHB Research - 21 Dec 2015