Inari Amertron (INRI MK; BUY; TP: MYR3.95): Proxy to Avago’s expansion

Inari Amertron (INRI MK; BUY; TP: MYR3.95): Proxy to Avago’s expansion

• What's New? We recently hosted Inari Amertron on a 2-day Non-Deal Roadshow (NDR) in Hong Kong. The management team was represented by Lau Kean Cheong (CEO) and Ho Phon Guan (Executive Director). We are upbeat on Inari’s new installed capacity to provide better scale, growth prospects and new business proposition. Reiterate BUY with an unchanged TP of MYR3.95, pegged on 16x CY16 PER. This offers a 20% upside and 2+% yields.
• What’s our view? Institutional funds were generally receptive towards Inari’s near-term growth which rides on bigger orders for its RF division from its major customer, Avago Technologies (AVGO US, Not-rated), which accounts for more than 90% of revenue. Queries were mostly on Inari’s (i) single-customer risk and mitigating strategies, (ii) capacity expansion, (iii) next growth catalyst, (iv) USD sensitivity.

Inari’s partnership with Avago blossomed even before its IPO in 2006 with Avago Malaysia holding a 13.5% strategic stake pre-IPO. Over the years, despite the exit of Avago as its shareholder, the working partnership has grown; Inari is today the largest test house for Avago’s RF products. While Avago remains its largest customer because of fast-growing outsourcing works, Inari has diversified its customer portfolio to include OSRAM and Agilent in recent years.

Going forward, Inari expects additional outsourcing of newer products by Avago following its recent acquisition of connectivity solution/enterprise storage related assets (i.e. CyOptics, LSI, PLX Technology, Emulex). For this, Inari’s wholly-owned ISK and Amertron are equipped to support fibre-optics related products.

Further strengthening of the USD also benefits Inari which is a net exporter in USD (90%/70% of its revenue/COGS in USD) - every 1% change in the MYR/USD is a 2.3% change to earnings.