Investment Highlights

• We maintain our HOLD call on Inari Amertron (Inari) with a fair value of RM1.65/share. Our valuation is based on an unchanged CY19F PE of 20x, while maintaining our earnings forecast.

• During Inari’s 2QFY19 briefing, the company indicated that a South Korean customer will forgo the iris scanner modules in favour of a larger display. This is seen in the latest model launched on 20 Feb, achieving a screen-tobody ratio of 93.1% (9.5ppt more than its predecessor).

• While the iris platform has been reconfigured to produce health sensor and facial recognition modules (both 2D and 3D), the number of orders is only sufficient to cushion half of the contribution that was generated from iris scanners. Nevertheless, we noted that Inari was still able to maintain the group’s lucrative net profit margin of 18-19%.

• The mini-LED (<2mm pixel pitch) segment is still running on 4 pilot lines, capable of producing 15mil units per month. While Inari has met its immediate customer’s requirement, there is a slight delay from the end customer in terms of qualification and testing. However, Inari expects this to be settled by year-end and to bump up production capacity to 50mil units per month in its P21 plant.

• Aside from that, the company 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. However, this will not materialise so soon, as its German customer may be going through a restructuring exercise. We have not factored 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 41% 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 - 25 Feb 2019