Investment Highlights

• We maintain our BUY call on Inari Amertron (Inari) but trim our FY19F-FY20F earnings forecast by 6%–10% to account for flattish growth from the radio frequency (RF) segment amid slowing smartphone sales. Our fair value is reduced to RM1.90/share (previously RM2.10/share), based on an unchanged CY19F PE of 20x.

• We came away from Inari’s 1QFY19 briefing learning that concerns pertaining to the removal of iris scanner from a flagship smartphone will be partially mitigated with the introduction of new products. The iris platform will be reconfigured to produce health sensor and facial recognition modules that will be featured in two upcoming flagship smartphone from South Korea and China respectively. Coming from a peak, we expect revenue contributions from the new products to be lower.

• The mini-LED (<2mm pixel pitch) segment currently has 4 pilot lines running, capable of producing 15mil units per month. Having met its customer’s requirement, management will soon bump up production capacity to 50mil units per month by year-end in its P21 plant. This will incur around RM30mil capex. For further production expansion above 50mil units per month, Inari will place the additional capacity in its Batu Kawan factory.

• Aside from that, management has said that the new 640K sq ft 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.

• Inari’s bread-and-butter RF business is expected to be flattish in the subsequent quarters owing to tepid smartphone growth amidst lengthier replacement cycle. Over the longer term, RF is still expected to see growth underpinned by the inevitable transition from 4G LTE to 5G, which will require more content per device. Higher content amplifies the average selling price of RF chips, thereby increasing Inari’s RF revenue. RF contributes circa 42% of the group’s revenue.

• We continue to like Inari due to: 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 rising demand for highresolution billboards in shopping malls.

Source: AmInvest Research - 28 Nov 2018