Thursday, May 18, 2017

Inari Amertron (INRI MK; BUY; TP: MYR2.45) - Progressing well

Inari Amertron (INRI MK; BUY; TP: MYR2.45) - Progressing well
  • There’s no change to our earnings forecasts, BUY rating, MYR2.45 TP (18x CY18 EPS; +2SD).
  • Business is progressing well as expected with RF division picking up in anticipation of major smartphone launches in 3QCY17 (i.e. Samsung Galaxy Note replacement, iPhone 7s/7s+/8). The shift in wafer size from 6” to 8” is on-going hence Inari is expecting growth for the RF division to taper down to just 8% YoY in FY17 vs management’s initial expectations of ~20%; we are currently projecting a decline of 3% before resuming growth in FY18 (+24% YoY). Overall, tone from management remains positive for this division which rides on adoption of faster cellular network – adoption of 5G in the developed markets will catch attention.
In order to cater for future demand, Inari have proceed to extend its P-13 plant which will add 60k sq ft in terms of floor space; this could potentially add another 100 testers bringing total test fleet to 800 testers. This expansion will cost MYR5.5m and will likely be completed in Aug 2017; works have already begun in mid-May 2017.  
Separately, Broadcom’s share price has also done very well in 2017 with major upgrades from brokers considering optimism for its Wireless division which outsources to Inari’s RF division.
  • Kicker from OSRAM’s IR LED product will see a full quarter contribution in 4QFY17 as production ramps up to 5m units per month beginning April. Capex investment for the second and third production line will incur in FY18; localization of equipment for the third production line would see a lower cost vs first production line (MYR25m for 5m/unit production). IR LED production from mid-Feb to Mar amounted to ~2.8m units cumulatively.
  • Expansion in P-13 would also benefit ISL which is involved in the fiber-optics chip fabrication. Growth in this segment would likely be in the region of high double-digit, coming from a small revenue base of just MYR60m.
  • In terms of cash position (end 9MFY17 net cash: MYR335m), MYR300m-350m will likely be set aside for future prospects, be it M&A or venture into a new related segment. Existing business is largely cash generative (End 3QFY6/17 CFO: MYR223m), as such higher dividend payout it possible. We have assumed a DPR of 75% in our last report.

ViTrox will be reporting its 1Q17 results tonight and it should be exciting given that share price has leapfrogged (MYR6.04; +63% YTD) beyond our upgraded TP of MYR4.70 in the last results note; our current rating is BUY. There will be a briefing tomorrow; expect a large crowd.

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