Inari Amertron Bhd
(Sept 8, RM3.35)
Upgrade to buy call with a higher target price of RM4: We are more comfortable to input Inari Integrated System’s (IIS) contribution into our forecasts now, as things become clearer following comments from Broadcom Ltd’s management during its conference call on Sept 1.

We project new revenue contributions from IIS of RM65 million, RM109 million and RM169 million in the financial years ending June 30, 2017 (FY17F [forecast]) to FY19F based on our tester unit assumptions of 58, 120 and 180 respectively.

At roughly 15% to 18% net margins, this increases our FY17F to FY19F earnings forecasts by 5% to 14% respectively.

Significant content gains in latest smartphone models (especially Apple iPhone) would comfortably help drive our 30% growth forecast for Inari’s radio frequency (RF) segment in FY17F, despite concerns over slowing smartphone sales.

The medium-term outlook appears to be relatively secure as well because of Broadcom’s three-year supply agreement with Apple (till 2018). Broadcom is in the midst of increasing its RF filter capacity (by converting six-inch wafer to eight-inch wafer fabs), which should ease supply constraints and possibly allow the company to supply to other smartphone manufacturers in the future besides Apple and Samsung.

With strong visibility for the RF segment and new contributions from IIS driving a robust three-year earnings compound annual growth rate of 22%, we believe Inari Amertron Bhd’s valuation could trade up to 18 times price-earnings (PE), +1 standard deviation of its three-year average forward PE.

Key risks to our view include a significant slowdown in demand for smartphones. This could affect sales for the RF segment. However, the impact may not be as severe because of the rising RF content in smartphones. — AllianceDBS Research, Sept 8