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Tuesday, December 22, 2015

Inari set to further grow radio frequency division

Inari Amertron Bhd ( Valuation: 1.50, Fundamental: 3.00)
(Dec 21, RM4.36)
Maintain buy with upgraded target price (TP) of RM5: Inari Amerton Bhd looks set to further grow its radio frequency (RF) division in tandem with Avago Technologies’ expansion as we step into 2016. This would continue to propel its earnings momentum for financial year 2017 (FY17) to

Inari currently houses over 600 testers under its RF division. The management is looking to ramp this up progressively to 800 units by October 2016 to be in line with Avago’s volume requirements.

We expect the machines to be installed in stages in its P13 plant with full-volume loading by the fourth quarter of 2016 (4Q16). We are forecasting for top-line contributions from its RF division to grow at 48%/26%/3% for FY16/FY17/FY18 respectively.

We expect the group to incur capital expenditure of RM100 million per annum for FY16 and FY17, taking into account the potential extension of its P13 plant (completion by 4Q16) and its proposed Batu Kawan site (ready by the second half of 2017).

We expect this to be funded internally, with its net cash closing at RM205.6 million as at September 2015.

We upgrade our FY16 to FY18 earnings per share by between 6.9% and 13.3% as we factor in our revised US dollar/ringgit assumption of RM4.34 going forward (from between RM4.10 and RM4.20).

Key risks include a potential hike in minimum wage for workers, customer concentration risk as we expect over 55% of its FY16 revenue to come from Avago, and fluctuations in earnings amid the current US dollar/ringgit volatility, given that all of its revenue and 70% of its production costs are denominated in US dollar.

Following our earnings revision, we upgrade our sum-of-parts-based TP to RM5 based on an unchanged 18 times 2016 price-earnings ratio. Its proposed one-for-four bonus issue would go ex on Jan 4, 2016, upon which our TP would be adjusted accordingly to RM4.

We use the discounted cash flow, based on the weighted average cost of capital of 8.8% and terminal growth rate of 1.7%, as a corroborative methodology and deriving a fair value of RM4.69, 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 foreign-exchange environment as well as its ongoing RF capacity expansion as we step into 2016. — Dec 21, RHB Research ( Valuation: 1.35, Fundamental: 1.10)

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