Investment Highlights

• We maintain HOLD on Inari Amertron (Inari) with a revised fair value of RM2.80/share (previously RM3.00/share), pegged to an unchanged FY19F PE of 18x. We have trimmed our FY18FFY20F net profit forecasts by 7-8% mainly on account of a revision in our USD/MYR assumption from 4.12to 3.95.

• Currently, >90% of Inari's revenue is denominated in USD, whereas only ~50% of total costs is USD-based. Our sensitivity analysis shows that for every 1% depreciation in the USD/MYR, Inari's earnings would decline by 3%.

• We expect the group to register sturdy YoY earnings growth in 2QFY18, fuelled by the full ramp-up of its RF chips in conjunction with several flagship smartphone launches. We also highlight that, currently, the monthly volume production of the group's iris-scanning components is nearly twice that of 1QFY18's. Nevertheless, the positives are dampened by both rising commodity prices and the weaker USD.

• The USD vs. MYR has depreciated 5.6% from 4.30 at the beginning of 1QFY18 to 4.05 at the end of 2QFY18F. In addition, copper and gold prices have risen by 22% and 6% respectively during the same period.

• Post-2Q, earnings are expected to moderate judging from an underwhelming response for the recent flagship smartphones after the initial months of launching.

• Over the longer term, catalysts are a surge in the adoption of iris-recognition technology and the commercial launch of 5G network. We believe 5G would significantly increase the complexity of RF chips and RF content per device in smartphones, underpinning ASP and profit margins of the group going forward. News flow suggests that the commercial launch could come as early as 2019 in South Korea. According to RCR Wireless, the country aims to launch a trial service of 5G for the 2018 Winter Olympics.

• 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.

• Overall, the group's prospects remain bright due to: 1) higher RF revenue due to increasing RF content per device; 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 we believe Inari's share price has priced in the positive prospects.

Source: AmInvest Research - 7 Feb 2018