Investment Highlights

• We maintain our HOLD recommendation on Inari Amertron (Inari) with unchanged forecasts, but a higher fair value of RM2.18/share (previously RM2.15/share) after rolling forward our earnings base to CY18F. The fair value is pegged to an unchanged PE multiple of 18x based on 1SD above its 3-year average.

• Inari recorded a core net profit of RM48mil in 4QFY17, representing a growth of 3% both QoQ and YoY. Cumulatively, FY17 net profit of RM200mil (+28% YoY) aligned with both our full-year forecast and consensus.

• We have stripped out a series of one-off gains amounting to RM28mil to arrive at the FY17 core net profit. These include grant income recognised, a gain on disposal of quoted investment and a gain on disposal of property, plant and equipment.

• We believe the improvement in 4QFY17 profit, both QoQ and YoY, was attributed to the sales of its iris-scanning components. Recall that the group's Inari Optical Technology (IOT) division commenced operations in midFebruary and reached optimal capacity of 5mil per month in April.

• In addition, management had indicated that the group would add some 80 additional testers in 2HFY17. We believe this also contributed to the profit growth in 4QFY17 through increased Inari's radio frequency (RF) testing revenue.

• The group is also extending its current P13 plant by another 60,000 sqft under the "P13b Expansion Plan". The new space will be used to house another 70 testers for its radio frequency chip production and also for its new products – Chip on Carrier (CoC) packaging solutions and vertical-cavity surface-emitting laser (VCSEL). The new facility is scheduled for completion by end of this month.

• Moving forward, revenue/profit growth of 28%/12% in FY18F is expected to be fuelled by: 1) higher RF orders from the launch of a flagship smartphone model in September 2017; 2) rising adoption of iris-recognition technology; and 3) capacity expansion in P13 plant to ready the group for more jobs.

• Although prospects appear bright for Inari, valuations are demanding. Inari currently trades at a CY18F PE of 21x, 2SD above its historical average.

Source: AmInvest Research - 23 Aug 2017