Investment Highlights

• We maintain our HOLD recommendation on Inari Amertron (Inari) but trim our FY19F–FY21F forecasts by 6% each due to escalating trade tension between the US and China. Our revised fair value is RM1.41/share (from RM1.45/share). Our valuation is based on 17.5x FY20F EPS, representing a -0.5SD discount from the 5-year average of 20x.

• Inari's FY19 core net profit of RM190mil (-17.5% YoY) came in within expectation. Revenue dropped 16.2% YoY due to declining smartphone sales, leading to a lower utilisation rate for its radio frequency (RF) testers.

• For 4QFY19, revenue rose 5.6% QoQ owing to seasonality as Inari begin ramping up production for the upcoming US smartphone launch in September. However, core net profit slipped 3% QoQ due to higher effective tax rate.

• The protracted feud between the US and China is expected to continue for the near future, which may dampen the outlook for semiconductor companies.

• Moving into the subsequent quarters, we foresee orders to improve QoQ, supported by the sale of the new US smartphone. However, we do not expect the new model to adopt 5G yet as the technology is still immature. Moreover, the US smartphone maker is known to be slower in terms of adopting new technology for its phones.

• 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 widespread deployment.

• 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 overall smartphone sales.

Source: AmInvest Research - 29 Aug 2019