Inari Amertron (INRI MK; BUY; TP: MYR3.20) - Strong rebound in earnings

We have a results note on Inari today.

Inari Amertron (INRI MK; BUY; TP: MYR3.20) - Strong rebound in earnings

• Warming up before the real sprint. While the QoQ rebound in 4QFY6/16 earnings, driven by production ramp-up, were largely expected, the quantum was a positive surprise. Going forward, we expect earnings to climb further, boosted by stronger RF demand from Broadcom in Sep 2016 to meet the demands of major smartphone makers notwithstanding a possibility of higher RF content in next generation smartphones. We retain our earnings forecasts pending a briefing today. Our MYR3.20 TP (15x CY17 PER) is unchanged for now. Inari is our only BUY in the sector.
• A bump-up in RF content in new smartphones? Broadcom’s (AVGO US, Not Rated) share price has climbed to an all-time high of USD177.34 (+22% YTD) being one of the prime beneficiaries of the adoption of carrier aggregation which requires more high-end RF filters supplied by Broadcom. Inari stands to benefit as a key semiconductor partner to Broadcom, who accounts for ~80% of FY16 revenue (45% coming from the RF division). For now, we expect revenue for Inari’s RF division to grow by 20% in FY17.
• Stronger growth in FY17. Following a slower pace in FY16 due to channel inventory adjustments by a key smartphone brand, we expect Inari’s operations to be back on a stronger growth trajectory (15% 3-yr earnings CAGR). Inari’s valuations are undemanding (13.4x ex-cash CY17 PER) considering its growth.