Inari looks set to further grow its RF division in tandem with Avago’s expansion, riding on higher volume requirements. This would continue to propel its earnings momentum for FY16-18. Maintain BUY, with our TP tweaked to MYR3.96 (from MYR4.00, 17% upside) to take into account its latest share base post the recent conversion of its warrants and ESOS.

Capacity expansion. We estimate that Inari Amertron (Inari) currently houses 600-700 testers under its radio frequency (RF) division. Management is looking to ramp this up progressively to 800 units by October, to be in line with Avago Technologies’ (Avago) (AVGO US, NR) volume requirements. We expect the machines to be installed in stages at its P13 plant, with full volume loadings by the end of the year. We expect topline contribution from its RF division to grow at 48%/26%/3% YoY for FY16F/FY17F/FY18F. Beyond that, the group recently proposed to acquire a new site in Bayan Lepas Free Trade Zone for MYR22.8m. We believe this new plant, measuring close to 200,000 sq ft, will likely be dedicated for the further expansion of its RF division – with positive earnings accretion likely by next year.

Capex allocation. We expect the group to incur capex of MYR100m pa this year and the next, and MYR60m in FY18 (Jun), taking into account the potential extension of its P13 plant (completion by 4QFY16) and its proposed Batu Kawan site (which, in our view, will be dedicated for light-emitting diode (LED)or fibre optics-related jobs). We expect this to be funded internally, with its net cash closing at MYR259.7m as at December last year.

Risks. Key risks include: i) customer concentration risk, as we expect over 55% of its FY16 revenue to come from Avago, ii) 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, and iii) a potential hike in minimum wages for workers.

Maintain BUY. While we make no major changes to our earnings forecast, we fine-tune our fully diluted SOP-based TP to MYR3.96 (from MYR4.00, based on an unchanged 18x 2016F P/E) to reflect its latest outstanding share base.