Investment Highlights

• We maintain our HOLD call on Inari Amertron (Inari) with a higher fair value of RM1.76/share (previously RM1.59/share), pegged to a rolled-forward CY21F PE of 17.5x. We reduce FY20F–FY22F earnings by 5–9% after adjusting the growth assumptions for the group’s optoelectronic products.

• Inari’s 1QFY20 core profit of RM49mil came in below expectations, accounting for 19% of our full-year forecasts and 21% of consensus’ estimates. This is after stripping off one-off net losses of RM1mil mainly from write-down of inventories and forex loss.

• 1QFY20 core profit declined by 14% YoY due to changes in product mix, higher depreciation and higher taxation compared to 1QFY19. This was despite adjusting for 1QFY19’s forex gains of RM3mil. Meanwhile, revenue fell 3% due to lower sales of its optoelectronic products.

• On a QoQ basis, 1QFY20 revenue rose 17% due to higher sales of radio frequency (RF) products despite Gartner’s 26 Sep 2019 report forecasting a 3.2% decline worldwide in shipment of devices (PCs, tablets and mobile phones) in 2019.

Meanwhile, 1QFY20 core profit soared 45% QoQ due to higher sales, lower deferred taxation and changes in product mix. This was after adjusting for 4QFY19’s one-off net gain of RM5mil mainly from a RM3mil reversal of inventories to net realizable value and forex gain of RM2mil.

• The Gartner report also said that users are holding onto their phones longer due to limited attraction of new technology, which we also believe is contributed by some users holding back purchases in anticipation of 5G adoption in upcoming models. 5G phones are predicted to account for more than half of phone sales in 2023 and the smartphone market is expected to return to growth at 2.9% in 2020 as a result of 5G adoption. We thus reiterate that 5G deployment remains as a crucial barometer of Inari’s RF segment growth.

• We like Inari for its longer-term prospects arising from its involvement in the production of: i) RF, which will benefit from the transition to 5G and rising content per device; ii) laser devices which will be boosted by increasing biometric and augmented reality (AR) applications in smartphones; and iii) LED, which rides on the increasing demand for high-resolution billboards in shopping malls.

• However, we remain cautious in the near term due to potential delays in the widespread deployment of 5G due to the US-China trade war. Maintain HOLD on Inari.

Source: AmInvest Research - 27 Nov 2019