This article first appeared in The Edge Financial Daily, on March 10, 2016.

Inari Amertron Bhd
(March 9, RM3.26)
Maintain buy with a target price (TP) of RM4: Inari Amertron Bhd has acquired five million shares in Taiwan-listed PCL Technologies Inc (PCL) from certain major shareholders of PCL, representing a 9.7% equity interest for a cash consideration of NT$355 million (RM44.53 million).

The acquisition price of NT$71 per PCL share is at an 8.4% premium above the closing price on Monday.

Inari has also entered into a memorandum of understanding with PCL, with the intention to set up a 50:50 joint venture (JV) in China for the purpose of providing outsourced semiconductor assembly and test services.

Subject to a satisfactory due diligence audit by PCL, Inari shall inject its wholly-owned subsidiary Amertron Technology (Kunshan) Co Ltd into the JV.

PCL is primarily engaged in the manufacture and sale of optical transceiver modules. These products are mainly used in telecoms networks and data centre infrastructure.

Its manufacturing facility is located in Suzhou, China.

Based on our channel checks, the current key customers of PCL are Avago Technologies Ltd (70%) and NEC (20%). We also understand that the company has indirectly penetrated into Huawei Technologies Co Ltd’s supply chain through the latter’s upstream subsidiary HiSilicon, and has become an exclusive provider of 10Gb optical transceiver modules.

We believe the proposed JV between Inari and PCL intends to utilise its facility in Kunshan to serve Huawei in the future.

Pending further details from management, we maintain our earnings forecasts for now. Nonetheless, we are positive on this venture given the growth potential of the telecoms infrastructure market in China and customer diversification.

Our RM4 TP is based on 18 times fully diluted financial year 2017 earnings per share, which are at a premium to the sector average given Inari’s growth potential.

The stock deserves to trade at a premium to peers given its close relationship with Avago, which has a strong lead in the fast-growing radio frequency market. — AllianceDBS Research, March 9