Investment Highlights

• We upgrade Inari Amertron (Inari) from a Hold to BUY with unchanged forecasts and fair value of RM2.80/share, pegged to an FY19F PE of 19x. The upgrade is in response to the recent selldown in Inari’s shares, which appears to be overdone.

• We believe the group is unlikely to be adversely impacted by the recent US and China trade measures. Assuming the US imposes tariffs/taxes on electronics manufacturing services (EMS) in China, this could prompt fabless companies in the US to look elsewhere for outsourced assembly and test (OSAT) providers like Inari as manufacturing in China becomes more expensive.

• We opine that the likelihood of China retaliating against smartphone and radio frequency (RF) players in the US is low, as it will do more harm than good for the Chinese consumers. Firstly, we note that there is no prominent RF player in China, thus eliminating the incentive to target this area. Secondly, while targeting smartphone players could boost the demand for Chinese smartphones such as Huawei and Oppo, but it would also limit the choices of consumers.

• Trade war concerns put to rest, Inari’s earnings are set to accelerate in 6-9 months, underpinned by jobs to manufacture laser and LED components for a German optoelectronics player, and the transition from 4G LTE to 5G, which is expected to kick off next year and will greatly increase RF content per device. To cater for these, major expansion plans are in place for the group’s existing P13 and P21 plants as well as in Batu Kawan.

• In addition, 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 also 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.

• Overall, Inari is set to register a sturdy earnings CAGR of 19% for FY17-FY20F. At the current price, Inari is trading at an attractive forward PE of 15.5x, below its 3-year historical average of 18.2x. Therefore, we believe the recent selldown offers opportunities for investors to accumulate and bank on Inari’s long-term execution excellence.

Source: AmInvest Research - 5 Apr 2018