Inari Amertron (INRI MK; BUY; TP: MYR3.80) - A proxy to Broadcom’s growth

We have (i) a post briefing note on Inari and (ii) results note on Pecca and MBM today.

Inari Amertron (INRI MK; BUY; TP: MYR3.80) - A proxy to Broadcom’s growth

• Expect double-digit growth in FY17. Inari is set to resume its double-digit earnings growth in FY6/17 (+27% YoY), riding on Broadcom’s growth, especially in the wireless (RF) division. Post yesterday’s analyst briefing, we upped our FY16-18 net profit forecasts by 3% each to account for stable margins (from a declining trend previously) from better sales mix and plant utilisation. Riding on an earnings upcycle with better visibility, we believe that Inari deserves to trade at 17.5x (+1SD) CY17 EPS (from 15x; +0.5SD). We raise our TP to MYR3.80 (+19%). Reiterate BUY.
• New forays could surprise. Inari’s latest P-21 has commenced operations earlier than expected. Operations are fast-tracked (1-month qualification by client) and a small initial order for the testing of Broadcom’s classic products, used in the telecommunications/cloud computing industry, was shipped out recently. Additionally, Inari is expected to deploy its P-1 plant for Osram’s full assembly and testing of a new component to be used in consumer electronic products. Mass production is expected in early 3QFY17. For now, we expect these new operations to contribute MYR150m/300m to Inari’s FY17/18 topline but see upside potentials.

PECCA Group (PECCA MK; BUY; TP: MYR1.95) - Above expectations

• Set to accelerate. FY6/16 core earnings beat our expectations. Following a slower FY6/16, we expect earnings to rebound strongly in FY6/17 (+57% YoY), to be driven by higher OEM sales from full-year contribution of Perodua’s Bezza which has seen remarkable response. Furthermore, a re-rating could come on the award of leather upholstery license for the aviation industry by DCA. Pecca remains as our Top BUY pick in the auto sector. We keep our earnings estimates and MYR1.95 TP (13x CY17 EPS) unchanged.
• Weak TIV is a catalyst for Pecca. With 7MCY16 TIV falling 17% YoY, we see this as an opportunity for Pecca as car manufacturers offer freebies (i.e. leather upholstery) to clear their 2015 inventory to meet targets by year-end. Also, solid demand for Bezza’s top variant (42% of total Bezza sales) would take Pecca’s OEM sales to the next level. We expect sales from Bezza alone to account for 29% of total OEM sales volume in FY17.

MBM Resources (MBM MK; BUY; TP: MYR2.70): Expect a much stronger 2H16

• Tale of two halves. As expected, MBM’s 2016 will be a tale of two halves whereby 2H16 would be significantly stronger HoH, driven by the contribution of Perodua Bezza at three levels: (i) stronger motor trading sales, (ii) rebound in auto parts manufacturing and (iii) better associates’ contribution mainly from 22.6%-owned Perodua. We retain our earnings forecasts pending a briefing today. Our MYR2.70 TP (9x FY17 PER) is unchanged for now. Maintain BUY on MBM for an exposure to Perodua.
• Perodua Bezza -  A game changer. In less than a month after its launch in July 2016, the Bezza model has recorded 19k units of bookings with over 6k units delivered; this beats our monthly sales forecasts of 7k units. Strong response for this model also benefits MBM which supplies auto parts (i.e. seatbelts, airbags, wheels) for this model. Consequently, its auto parts manufacturing could turnaround in 2H16, partially reversing its MYR8.1m operating loss in 1H16. Should the sales momentum for Bezza sustain beyond 3 months, we see upside potential to our earnings forecasts for MBM.