Inari is looking to penetrate into Broadcom’s non-RF segments to help diversify its earnings base. The recent tie-up with PCL could accelerate its expansion into the Chinese market as Inari intends to capitalise on its strength in advanced system-in-package technology. These two initiatives could cement the group’s prospects over the next 2-3 years. Maintain BUY with our TP revised to MYR3.80 (from MYR3.96, 18% upside).

P21 up and coming. Inari Amertron (Inari) is finalising the acquisition of a new production site in Bayan Lepas Industrial Zone for MYR22.8m. This facility, to be named P21, comprises total floor space of over 200,000 sq ft. For a start, Inari is looking to conduct testing services for Broadcom’s (AVGO US, NR) nonradio frequency (RF) products. The group is looking to invest as much as MYR180m over the next 12 months to ramp up this new segment with commercial operations to commence by mid-2017. The amount includes the matching 1-to-1 grant of MYR100m secured from the Malaysian Investment Development Authority.

PCL tie-up eyeing China. In early March, Inari acquired a 9.7% stake in PCL Technologies (PCL) (4977 TT, NR) for MYR44.5m. It has committed to settingup a 50:50 joint venture (JV) in China to provide assembly and test services to China-based customers. We believe Inari is ultimately looking to penetrate into the Chinese smartphone component market by leveraging on its expertise in advanced system-in-package technology and by tapping into PCL’s existing customer base in China. The required capital outlay is being finalised, with the JV eyeing a new facility in China to accommodate up to five production lines under its initial phase at an estimated cost of USD10m per line.

3QFY16 (Jun) results preview. The group is set to release its 3QFY16 results by end-May. We expect core earnings o MYR20m-30m as we gather that the run-rate under its RF segment came down by over 30% QoQ in tandem with its end-customer’s inventory adjustment. We expect numbers to rebound in4QFY16 with the impending launch of a flagship smartphone in Sep 2016.Forecasts and risks. We cut our FY16F-18F EPS by 8.5-14.5%, factoring in delay in the full ramp-up of its RF segment to 1QFY17 (from 4QFY16) and our revised FY16F-18F USD/MYR assumptions of MYR4.00-4.10 (from MYR4.20-4.25). Key risk to our call would be the strengthening of the MYR. Given theMYR’s current strength against the USD, we highlight that every 1% appreciation in the MYR against the USD could translate into earnings downgrades of 1.5-2.0%, ceteris paribus.

Maintain BUY. We lower our TP to MYR3.80 (from MYR3.96) as we roll forward our valuation to FY17F (from 2016) based on an unchanged 18x P/E.We use DCF (8.9% WACC, 1.5% TG) as a corroborative methodology and derive a fair value of MYR3.58, which we deem reasonably close to our revised TP. Keep BUY as we laud management’s move to strengthen its presence outside the RF space by working with Broadcom, while its tie-up with PCL could open up new opportunities in the Chinese semiconductor manufacturing space.

DCF valuation. Under our corroborative DCF valuation, we assume annual capex allocation of MYR100m for FY17F, before tapering off to MYR60m pa taking into account the potential ramp-up of its new plant in P21 as well as its latest JV in China. We peg a terminal growth rate of 1.5%, which we deem reasonable as we expect Inari to benefit in the long run from more outsourcing opportunities from Broadcom’s series of acquisitions over the past 24 months outside the RF space. The derived equity value of MYR3.58 translates into 16.6xFY17F P/E, which we deem to be reasonably close to our target multiple of 18.0x.

Source: RHB Research - 6 Apr 2016