Investment Highlights

• We upgrade Inari Amertron (Inari) to BUY from HOLD with a higher fair value of RM2.01/share (from RM1.69). This is pegged to a higher CY21F PE of 23.5x (previously 17.5x) in line with its 5-year historical average PE, reflecting the scarcity premium of technology stocks in the local market and Inari’s role as a proxy to 5G growth.

• We cut our FY20F earnings by 26% to account for expectations of lower overall sales amid Covid-19 uncertainties and consequently trim our FY21F–FY22F earnings by 2-8%.

• Key takeaways from our 3QFY20 conference call:

• 9MFY20 results summary: Inari recorded a core profit of RM106mil after excluding net one-off gains of RM14mil mainly from unrealized forex gains and reversal of inventories written down. Core profit slumped 31% YoY due to: (i) 7% lower revenue primarily due to decline in optoelectronic sales from the automotive and industrial segments; (ii) lower production shipments because of lockdowns relating to Covid-19; (iii) higher depreciation; and (iv) higher effective tax rate. 9MFY20 EBITDA margin remains intact despite at 26% (vs. 27% in 9MFY19). The group also saw a change in product mix (Exhibits 1 & 2).

• Covid-19 operational updates: Inari’s operations in Malaysia, China and the Philippines had been impacted by partial and/or complete lockdowns relating to Covid-19 as production capacities had been restricted amid pandemic containment measures. Following easing of lockdowns, the group’s Malaysian operations have been fully operational since 29 April 2020, its China operations have since fully resumed from 1 April 2020 and its Philippines operations at ~85% capacity as at end-May 2020.

• Radio frequency (RF) updates: The group’s RF segment performed reasonably well in 3QFY20 despite being a low period (usually during the January to March cycle). Meanwhile, Inari still expects RF orders to ramp up June 2020 onwards (unchanged from pre-Covid-19 outlook) with expectations that 1QFY21 will coincide with the cycle for new 5G phones. Both its P34 plant in Batu Kawan and P13 plant have been prepped to maximize utilization and support the demand of RF products.

• Sensor product updates: The production of health sensors and miniLED is ongoing albeit on spot order basis due to limited visibility, while the production of 3D facial recognition sensors began in November 2019 and has ramped up capacity by March 2020 – with shipments going out as planned despite the MCO.

Source: AmInvest Research - 9 Jun 2020