Investment Highlights

• We keep our BUY on Inari Amertron (Inari) with a higher fair value of RM2.78/share pegged to a higher CY22F PE of 28x (previously RM2.45/share CY22F PE of 23.5x).

• The higher PE is in line with our benchmark target PE for outsourced semiconductor assembly and test (OSAT) companies of 28x, a 20% premium above the 3-year historical forward PE of 23x as prospects brighten due to innovations such as 5G, 3D sensors, and electric vehicles, which progress has been accelerated by Covid-19.

• We raise our FY21F forecasts by 11% to account for higher contribution for Inari’s radio frequency (RF) division with the addition of more system-in-package (SiP) lines.

• We came away from a recent engagement with Inari with the following key highlights:
  • Capacity expansion for RF division: Inari’s RF division has nine additional SiP lines running since 1QFY21, with the addition of five more lines slated from mid-October to early December 2020. This raises total SiP lines to 22, from eight lines in FY20 – an increase of 2.75x YoY. The strong RF demand is accredited to a key US smartphone maker’s 5G-enabled releases, leading to expectations of a potential 5G-driven upgrade cycle for consumers.
  • Higher orders for CoC products: In its optoelectronics division, the outlook for industrial products has improved although the automotive segment outlook remains unchanged. Due to challenging market conditions, sales are still on a spot order basis. Meanwhile, fiber optic communication networks have seen increased demand, particularly for chip-on-carrier (CoC) solutions.
  • Working on customized equipment partnership: As for Inari’s JV with MIT Semiconductor to provide customized semiconductor manufacturing solutions, the group is strategizing critical in-house developed processes and already started filing patents for their projects. Inari is working on realizing synergies to enhance its customer base and revenue streams.
  • Update on new customers: Inari’s Hong Kong-based customer in Clark, the Philippines, completed setup for back-end testing in June 2020 and the front-end assembly lines are currently being set up. Mass production is slated for January 2021.

Meanwhile, its Swiss-based customer at P34 is working on a sub-module assembly after its production facility was installed and 1st product qualification was completed.

• We continue to like Inari due to its role as a proxy for the growth of 5G through its RF business, despite caution relating to the Covid-19 pandemic. The group’s positive prospects arise due to: (i) the resilience of its RF earnings due to higher chip complexity in 5G phones; (ii) potential growth in laser devices from more biometric and AR applications; and (iii) its efforts to enhance and diversify revenue streams.

Source: AmInvest Research - 27 Oct 2020