Investment Highlights

• We maintain our HOLD recommendation on Inari Amertron (Inari) with unchanged forecasts and fair value of RM2.80/share based on 18x FY19F EPS.

• Inari's 2QFY18 core net profit came within our expectations and consensus at RM79mil, representing growth of 12% QoQ and 72% YoY. This brings 1HFY18 core profit to RM149mil (+63% YoY), accounting for 59% of our full-year forecast and 54% of consensus estimate. Note that we have stripped out a realised currency loss amounting to RM12mil for 1HFY18.

• 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, we understand that iris chips' monthly volume production in 2Q was nearly twice of 1Q's.

• Moving into 2HFY18, earnings are expected to moderate due to seasonality and also 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. According to Reuters, network operators in South Korea, Japan and the United States intend to launch 5G this year or in 2019. 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.

• Inari is in the midst of expanding its P13 plant by an additional 120K sq ft (P13B second phase extension). The new facility will be able to house circa 300 new testers, strengthening the group's position in securing new jobs going forward. The facility is slated for completion by endApril 2018.

• The group added 10 new testers during the quarter, bringing the total to 970. This is ahead of its schedule to increase the total number of testers to 1,000 by end-FY18.

• 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, the positives are dampened by both rising commodity prices and the weaker USD. Hence, we are keeping our HOLD recommendation as Inari appears fairly valued at this price.

Source: AmInvest Research - 28 Feb 2018