Investment Highlights

• We maintain our HOLD recommendation on Inari Amertron (Inari) with unchanged forecasts and fair value of RM1.76/share, pegged to a CY21F PE of 17.5x.

• We attended Inari’s 1QFY20 analyst briefing and came away with the following key highlights:

o Results recap: 1QFY20 core profit declined 14% YoY due to unfavorable change in product mix and as revenue fell 3% amid lower sales of optoelectronics and fiber products due to lower Kunshan and Amertron contribution as a result of a slowdown in the automotive and industrial markets, as well as sales decline of irisscanning devices. Meanwhile, 1QFY20 core profit and revenue rose by 45% and 17% respectively QoQ due to higher volume loading particularly that of its radio frequency (RF) products, as well as due to favorable product mix.

o Update on P34 (Block B) plant in Batu Kawan: In anticipation of growth in RF demand due to expectations of higher RF content per device with 5G adoption, the group aims to add eight RF lines to the facility by June 2020, with two lines already in-store. Meanwhile, Block C is catered for future customers.

o Capex spend for FY20F will be more focused on improving equipment capabilities to improve lead time.

o Update on products: Inari has been producing health sensor products to support its Korean customer, although still at a small volume. Meanwhile, production of its 2D & 3D facial recognition module is ramping up for an upcoming flagship Korean smartphone. Mini-LED contribution will build up from December 2019 but is also anticipated to not be meaningful in the near-term due to its low volume.

• We like Inari for its longer-term prospects arising from its involvement in the production of: 1) RF, which will benefit from the transition to 5G and rising content per device, 2) laser devices which will be 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 on Inari in the short-term and maintain our HOLD recommendation amid potential delays in the widespread deployment of 5G due to the US China trade war.

Source: AmInvest Research - 28 Nov 2019