Investment Highlights

• We maintain our HOLD recommendation on Inari Amertron (Inari) with unchanged forecasts and fair value of RM2.80/share, pegged to an FY19F PE of 19x.

• We came away from Inari's analyst briefing feeling positive about the company's growth prospects. We highlight below the key takeaways from the session:

1. Management is confident that the group's Inari Optical Technology (IOT) division, which produces irisscanning components, can operate at full capacity in the coming quarter, reaching volume of 10mil units/month vs. 7—8mil units/month this quarter. This is underpinned by the recent launch of a flagship South Korean smartphone, which contains iris-scanning chips manufactured by Inari. Inari plans to install 2 additional lines for the division, expanding its production capacity by 5mil units/month to cater for new product applications. However, no timeline has been provided for the development.

2. Inari plans to relocate operations in Paranaque (PQ) to existing plants in Clark Field (CK). The move will allow its wholly-owned Amertron Inc to reap a fair amount of cost savings as CK plants are situated in Clark Freeport Zone, which entitles investors to certain tax incentives. In addition, the group will be able to save labour cost and lease expenses of >RM100K/month it currently pays for PQ factory's lease. In the future, management expressed possibility of relocating P8 plant to P13 as both are producing RF components. These moves are expected to improve the group's net margin going forward.

3. 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, readying the group for the 5G wave. The facility is slated for completion by end- April 2018. In addition, the group targets to build a block of 170K sq ft factory in Batu Kawan by Sept-Oct 2018, catering for jobs from its optoelectronics customer. Overall, major expansion plans are underway, but meaningful contributions are only expected in FY19.

• 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 - 1 Mar 2018