Investment Highlights

• We reiterate our BUY recommendation on Inari Amertron (Inari) but trim our FY19F-FY21F forecasts by 18%-20% due to: (1) lower utilisation rate for its radio frequency (RF) segment; and (2) a possible cut in demand for its iris scanner. Our fair value is reduced to RM2.10/share (previously RM2.61/share), pegged to an unchanged CY19F FD PE of 20x, in line with its 3-year average.

• Inari's 1QFY19 core net profit of RM60mil (-14.2% YoY) came in below our expectation, accounting for only 17% of our full-year forecast and 20% of consensus estimates.

• The company’s earnings were affected by lower utilisation rate for its RF testers. This is due to reduced production orders by one of Inari’s key customer for all three of the latest US flagship smartphone amid lacklustre sales.

• Not helping either is the fact that Inari may see lower demand for its iris scanner as the upcoming Korean flagship smartphone will likely remove the iris scanner in favour of a higher screen-to-body ratio. In line with the current trend, the in-display fingerprint biometric sensor will probably be the only authentication system, making way for a larger battery capacity. Both the iris scanner and RF account for approximately half of Inari’s revenue.

• On a brighter note, Inari is diversifying its revenue by working with its German customer to develop several new products: (1) fine-pitch LED (<2mm pixel pitch) used for billboards; and (2) health sensor as well as verticalcavity surface-emitting laser (VCSEL) components for both 2D and 3D sensing applications. We believe meaningful earnings contributions from the new products will start showing in 6–9 months.

• Furthermore, Inari is building a new 600K sq ft factory Batu Kawan. Management has said that the new Batu Kawan facility is to cater for additional jobs from its German optoelectronics customer, as well as potential new jobs from prospective customers. With the new capacities, Inari is almost doubling its floor space. We have not factored in any earnings contribution from its Batu Kawan facility into our profit forecasts.

• Overall, we expect Inari’s earnings to register a CAGR of 18.5% from FY18 to FY21F, riding on 3 core pillars: 1) RF, which benefits from the transition to 5G and rising content per device; 2) laser devices, which are boosted by increasing biometric and augmented reality (AR) applications in smartphones; and 3) LED, which rides on the increasing demand for high-resolution billboards in shopping malls.

Source: AmInvest Research - 27 Nov 2018