Inari Amertron (INRI MK; BUY; cum-rights TP: MYR4.20): Growth momentum to sustain

Initiation: Inari Amertron (INRI MK; BUY; cum-rights TP: MYR4.20): Growth momentum to sustain

• What's New? We met with Inari recently to understand the rationale behind the recent 5.05-acre land acquisition in Batu Kawan Industrial Park, Penang mainland. Management shared its aspiration to further grow its fibre-optics division, currently based in Johor, in Penang as it believes that it will be its next growth engine. The site, located near the exit to Batu Kawan from the second Penang bridge, was selected due to its close proximity (~25km) to Inari’s existing plants and Penang’s technology ecosystem in the island.

Elsewhere, we expect 4QFY14 results to be within expectations at MYR30-35m (+21-41% QoQ), driven by: (i) ramp-up in production from the RF division for Avago in lieu of Apple’s upcoming launches; (ii) stronger contribution from 51%-owned Ceedtec from the conversion of design prototypes to mass production for Agilent.

• What’s our view? On the back of the increasing number of smart device users and cloud computing activities, Cisco forecasts a >10x jump in global mobile data traffic to 15.9 exabyte (EB)/month by 2018. As such, we see opportunities for Inari’s wholly-owned ISK from a shift in demand to high-speed fibre-optics transceivers from lower-speed copper transceivers to facilitate the need for faster and bigger data transmissions among storage servers and networking products.
• We expect ISK’s contribution to group revenue to be minimal in FY14 and to be more meaningful from FY15 onwards whereby we project revenue of MYR50m in FY15 and MYR80m in FY16.
• Other possible near term catalyst? We see potential upside to earnings on the back of (i) a potential uptick in demand for smart devices and fibre-optics transceivers and (ii) potential new manufacturing contract awards.