Investment Highlights

• We maintain our HOLD call on Inari Amertron (Inari) with an unchanged fair value of RM1.45/share. Our valuation is based on an unchanged FY20F PE of 17.5x, while maintaining our earnings forecast.

• We came away from Inari’s 3QFY19 briefing learning that the company is expecting improvements in the following quarters, particularly in the radio frequency (RF) segment.

• Inari’s key customer is in the midst of finalising the RF circuit designs and qualification test in anticipation of the upcoming US smartphone launch in September. Deliveries of RF orders are expected to begin soon, albeit at a small quantity and will ramp up in the next quarter, in line with historical trend.

• According to IDC, the US smartphone maker shipped 30.2% less units in 1Q2019 compared with 1Q2018 (Exhibit 1). However, Inari clarified in the briefing that its RF shipment only dipped 10% during the same period. This is because the higher RF content per device has cushioned the decline in the US smartphone shipment.

• The trend of increasing RF content per device is expected to continue with a major spike anticipated when 5G kicks in. The Global Mobile Suppliers Association estimated that the bulk of future 5G network will be operated via the sub 6Ghz frequency range (Exhibit 2), which requires more RF content to ensure smooth connectivity by filtering out interference.

• The production of health sensor and facial recognition modules (both 2D and 3D) is still ongoing for an upcoming flagship Korean smartphone and a Chinese customer.

• The mini-LED production line remains in its pilot stage. Its German customer is currently sorting out new product designs before passing on orders to Inari, which will be housed in Block A of the new P34 plant in Batu Kawan.

• Block B is expected to cater for spillover RF testers as its US customer is constantly consigning more testers to Inari in preparation for 5G connectivity, while block C is to cater for new customers in the future.

• Stripping out contributions from the disposed Ceedtec Sdn Bhd and the discontinued iris scanner project in FY18, Inari’s 9MFY19 revenue only slid 7.4% instead of the unadjusted 18% decline reported. Furthermore, Inari’s ability to maintain a net profit margin of 17%–19% amid the challenging semiconductor landscape reassures its resilience.

• We like Inari over a longer term for its 1) RF, which benefits from the transition to 5G and 2) LED, as demand for highend billboard increases. However we remained cautious in the immediate term due to the US-China trade dispute.

Source: AmInvest Research - 27 May 2019