Investment Highlights

• We maintain our HOLD recommendation on Inari Amertron (Inari) but trim our FY19F–FY21F forecasts by 11%–17% due to a prolonged weakness in the semiconductor industry, coupled with the escalating trade tension between the US and China. After rolling over our valuation period to FY20F, the revised fair value is RM1.45/share (from RM1.65/share). Our valuation is based on 17.5x FY20F EPS, representing a -0.5SD discount from the 5-year average of 20x.

• Inari's 9MFY19 core net profit of RM150mil (-31% YoY) came in below expectation, accounting for 63% of our fullyear forecast and 68% of consensus estimates. 3QFY19 core net profit of RM32mil fell 45% QoQ and 60% YoY, partly due to seasonality.

• The main reason for the decline is the trade war between the US and China that has been dragging on longer than expected, taking a toll on the company’s business as customers held back orders as a precautionary measure.

• Earlier this month, the market expected conducive “final” trade talks between the US and China, but it ended with the US signing an executive order to ban Huawei from conducting business with US technology companies.

• While this may paint a negative picture for the already lacklustre smartphone market as users refrain from purchasing Huawei devices until the dust settles, the US smartphone maker that is currently trailing behind the second-placed Huawei may potentially benefit by regaining market share, albeit marginally.

• Inari’s new product, fine-pitch LED (<2mm pixel pitch) used for billboards, has yet to ramp up from its pilot stage, leaving a void caused by the decline in smartphone sales.

• We still like Inari over a longer term 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 high-resolution billboards in shopping malls.

• However, we remain cautious in the immediate term as the fight for 5G between the US and China may potentially delay wide-spread deployment.

Source: AmInvest Research - 24 May 2019