We are turning cautious on Inari as we opine that investor sentiment could be affected by the MYR’s further strengthening against the USD,while medium-term earnings visibility could turn murky amidst the gloomy premium smartphone outlook. As such, we downgrade our call to NEUTRAL, with our TP revised to MYR3.00 (from MYR3.80, 8% upside).Forex boon could be over. We believe the favourable forex environment for Malaysian exporters could soon come to an end as we: i. Expect the USD to average MYR3.80 in 2017 (vs 4.00 in 2016); and, ii. Estimate that every 1% appreciation in the MYR against the USD could translate into earnings downgrades of 1 -1.5% for Inari Amertron (Inari), assuming all else as constant.

To mitigate the potential negative impact, the group is actively monitoring the situation and would have to engage in pricing renegotiations with its customers in the event of sharp fluctuations in the currency.

iPhone facing a bottleneck? Apple Inc announced that its iPhone shipments totalled 51.2m in 1Q16 (-16.3% YoY). Although this is not exactly newinformation, as demand for the latest iPhone 6S have been sluggish, the technology giant’s 2Q16 guidance again came in at 10-15% below street estimates. This, in our view, could translate into further inventory correctionsand potential softer orders for its component suppliers over the near term. In addition, various media reports suggest that Apple could hold back some of its latest innovations from the impending launch of iPhone 7 series in Septeberthis year, citing that most of the new features might only be included in next year’s model. Should this turn out to be true, we foresee further weakness in iPhone shipment volumes over the medium term.

Inari to release 3QFY16 results by 18 May. W e expect core earnings of MYR20m-25m as we gather that the run-rate under its RF segment came down by over 30% QoQ which is in tandem with its end-customer’s inventory adjustments.

Forecasts and risks. We cut our FY16F-18F EPS by 11-13%, factoring in a potential delay in the full ramp-up of Inari’s radio frequency (RF) segment to 2QFY17 and our revised USD/MYR assumption of 3.80 from 2017 onwards. Downgrade to NEUTRAL. With the forex theme likely to go out of favour in anticipation of a further strengthening in the MYR as we move into next year and potential further weakness in premium smartphone sales we now peg the stock to a revised 1-year forward P/E of 15x (from 18x and at 20% premium to regional peers). Our TP is MYR3.00. We also used DCF (Figure 4) as a corroborative methodology and derived a fair value of MYR2.99.

DCF valuation. Under our corroborative DCF valuation, we assume annual capex allocation of MYR100m for FY17, before tapering off to MYR60m pa. This is taking into account the potential ramp-up of its new plant in P21 as well as its latest joint-venture (JV) in China. We peg a terminal growth rate of 1%, which we deem reasonable as we expect Inari to benefit in the long run from more outsourcing opportunities from Broadcom Corp’s series of acquisitions over the past 24 months outside the RF space. The derived equity value of MYR2.99 translates into 14.6x 2017F P/E, which we deem to be reasonably close to our target multiple of 15x.