Investment Highlights

• We maintain our HOLD call on Inari Amertron (Inari) with an unchanged fair value of RM1.41/share. Our valuation is based on an unchanged FY20F PE of 17.5x, while maintaining our earnings forecast.

• We came away from Inari’s 4QFY19 briefing learning that the company is seeing a pickup in activity for its radio frequency (RF) segment. Utilisation rate for 1QFY19 is expected to be better QoQ and YoY.

• Inari’s key customer has finalised the RF circuit designs and qualification test for the upcoming US smartphone launch in September. Deliveries of RF orders have begun and subsequent orders will be dependent on consumers’ response towards the upcoming US smartphone. The RF segment contributes 40% to group revenue.

• While overall smartphone sales are slowing, Inari is somewhat spared from the fall due to rising RF content per phone with every new model, supporting more frequency bands. However, we do not expect the upcoming US smartphone to be 5G-enabled as the technology is still immature. Also, the US smartphone maker is slower that its peers in adopting new cellular technologies, as seen in its previous adoption of 4G and 4G LTE.

• For the P34 (Block B) plant in Batu Kawan, the company has begun assembly of interior facilities. Its key customer has requested Inari to prepare the extra floor spac, in anticipation of more RF assembly (system in package) jobs. Inari expects its RF assembly lines to double by June 2020. We believe the new jobs are catered for 5Grelated devices.

• The production of a health sensor and facial recognition module (both 2D and 3D) is still ongoing for an upcoming flagship Korean smartphone in 2020. Existing 3D modules such as the time-of-flight (ToF) sensor are available in the recently launched Korean flagship model.

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

• Inari has yet to receive any mini-LED orders from its German customer. Existing lines in P34 (Block A) are still in the pilot stage. Currently, the German customer is preoccupied with the takeover offer it was presented with. Until the takeover deal is finalized, we do not foresee any meaningful contribution from the mini-LED segment in the immediate term.

Source: AmInvest Research - 30 Aug 2019