Inari Amertron (INRI MK; BUY; TP: MYR3.95): More Avago content in new devices

Good morning,

Inari Amertron (INRI MK; BUY; TP: MYR3.95): More Avago content in new devices

• What's New? Samsung recently launch its latest flagship smartphones, Galaxy S6/S6 Edge. We notice an increase in the number of Avago RF chips, to 2 chips each, in Galaxy S6/S6 Edge (from 1 chip in Galaxy S5) as revealed in the teardown of these smartphones by iFixit and Chipworks:

Galaxy S6 Edge: http://www.chipworks.com/en/technical-competitive-analysis/resources/blog/inside-the-samsung-galaxy-s6/

Galaxy S6: https://www.ifixit.com/Teardown/Samsung+Galaxy+S6+Edge+Teardown/39158

Galaxy S5: https://www.ifixit.com/Teardown/Samsung+Galaxy+S5+Teardown/24016

• What’s our view? With its newly installed capacity, P13, we see upside potential to our earnings forecasts as Inari rides the waves of higher demand for Avago’s RF chips. Presently, we estimate that Inari will operate 572/672 test handlers at 85%/90% utilisation by end-4QFY15/end-1HFY16. Should there be more orders, we could see a 5%/3% jump in our FY16/FY17 revenue forecasts, assuming on an increase of 50 test handlers and 100% utilisation. Ceteris paribus, we see 5%/3% upside to our FY16/FY17 net profit forecasts. We understand that P13 could house up to ~300 test handlers in total, of which 150 units has been accounted for in our forecasts.

Also, Inari is a beneficiary of the stronger USD against the MYR as >90% of its revenue is denoted in USD vs. just 70% of its COGS. The USD/MYR rate has weakened 11% YTD, currently at USD1/MYR3.63, which is 5% above our forecast of USD1/MYR3.45 average for 2015. Our sensitivity analysis suggests a 11% upside to earnings on a full-year basis should the current USD/MYR remain.

We continue to like Inari for its near-term earnings prospects in the tech space. Valuations are undemanding at 14x CY16 PER (domestic peers’ average is 14x CY16 PER) for a growth stock (22% 3-year earnings CAGR) backed by yields of 2+%. Reiterate BUY.