Investment Highlights

• We maintain our HOLD recommendation on Inari Amertron (Inari) with unchanged forecasts and fair value of RM3.00/share based on 18x FY19F EPS.

• Inari's 1QFY18F core net profit came within our expectations and consensus at RM70mil, representing growth of 45% QoQ and 53% YoY. The core profit accounted for 26% of our full-year forecast and 27% of consensus estimate. The strong performance was mainly attributed to the recent launch of several flagship smartphone models, resulting in higher radio frequency (RF) chip orders. In addition, the production of irisscanning components has also picked up significantly during the quarter.

• We believe earnings will see further upsurge in 2QFY18 as the group captures the full ramp-up of its RF chips, premised on strong demand for the new flagship smartphones. We also highlight that the current monthly volume production of the group's iris-scanning components is nearly twice that of 1QFY18's.

• According to Forbes, Inari's existing Korean customer has revealed its plans to develop a bendable smartphone, which is the first of its kind. We believe the potential deployment of the group's iris-scanning components in the device could be a major valuation kicker moving forward. Aside from existing customers, the group is currently in talks with other smartphone makers (e.g. Chinese players) for the deployment of its iris-scanning components.

• With regards to Inari's P13B second phase extension, management said that the group has obtained approval for the facility’s construction, and is now undergoing piling works. The new facility will expand floor capacity by some 120K sq ft, and will be able to house circa 300 more testers, which would strengthen the group's position in securing new jobs. The facility is slated for completion by mid-April 2018.

• The group added 110 new testers during the quarter, bringing the total to 960. This is ahead of its schedule to increase the total number of testers to 1,000 by end-FY18.

• Overall, the group's prospects in FY18F remain bright due to: 1) higher RF orders from the launch of a flagship smartphone model; 2) rising adoption of iris-recognition technology; and 3) capacity expansion in P13 plant to prepare the group for more jobs. Nevertheless, we are keeping our HOLD recommendation as the share price trades near its fair valuation.

Source: AmInvest Research - 22 Nov 2017