Investment Highlights

• We downgrade our recommendation on Inari Amertron (Inari) to HOLD from BUY and trim our FY19F-FY21F forecasts by 5.1%–8.3% due to lower contribution from the radio frequency (RF) segment and the removal of the iris scanner from a South Korean flagship model. Our fair value is reduced to RM1.65/share (previously RM1.90/share), pegged to an unchanged CY19F FD PE of 20x, in line with its 3-year average.

• Inari's 1HFY19 core net profit of RM118mil (-15.3% YoY) came in below our expectation, accounting for 45% of our full-year forecast and 49% of consensus estimates.

• 2QFY19 earnings of RM58.1mil represents a 3.3% dip QoQ and a 16.4% decline YoY. This is broadly expected following weak smartphone sales figure during the Christmas season, specifically the US flagship devices.

• The recent launch of new South Korean flagship devices also confirmed the removal of the iris scanner in favour of a higher screen-to-body ratio. While the iris platform was reconfigured to produce a health sensor and facial recognition modules, it was not sufficient to cushion the decline in overall orders.

• With regards to Inari’s new product — fine-pitch LED (<2mm pixel pitch) used for billboards — the ramp-up from its pilot stage did not take off as quickly as expected. This has left a void, mainly caused by the fall in smartphone sales.

• Inari’s new 640K sq ft factory in Batu Kawan is said to cater for additional jobs from its German optoelectronics customer, as well as potential new jobs from prospective customers. However, management is still unable to disclose any details, hence we have not factored any earnings contribution from its Batu Kawan facility into our profit forecasts.

• We continue to like Inari for its: 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 highresolution billboards in shopping malls.

• However, we remain cautious in the immediate term as the fight in 5G between the US and China may potentially delay commercial roll-out of 5G connectivity.

Source: AmInvest Research - 22 Feb 2019