Investment Highlights

• We reiterate BUY on Inari Amertron (Inari) and raise our bonus adjusted fair value from RM1.87/share to RM2.50/share. We are pegging our fair value to a higher CY19F FD PE of 20x, as its recent capacity expansions put it in a better position to win new jobs and pose greater upside risks to our earnings projection. In addition, we have revised upwards our FY18F-FY19F profit forecasts by 10% and FY20F’s by 32% to reflect higher expected orders of LED and laser components from a German customer.

• We came away with a visit to Inari’s P21 plant learning that its recently available space is ripe for production ramp-up in 1HFY19 (3–6 months’ time). In particular, the new space will be utilised for the production of new laser and LED components. Applications of the laser devices are mostly in smartphones, while the LED components will likely be used for billboards and other public display panels.

• The revenue potential of these new products is substantial. To give some context, the two segments, taken in isolation, could be more sizeable than the group’s radio frequency (RF) business if matured (but would likely take 2–3 years). Its RF division currently contributes about 45% of total revenue. We expect the segments to start showing meaningful contributions in 6–9 months’ time.

• Aside from the new products, the group’s bread-and-butter RF business is expected to grow sturdily on the back rising content per device. Higher content amplifies the average selling price of RF chips, thereby increasing Inari’s RF revenue despite modest growth in smartphone volume. Going into 2019–2020, RF content growth is expected to be fuelled by the transition from 4G LTE to 5G. Currently, most news flows suggest that 5G will begin rolling out within the next 2 years.

• Inari has recently purchased a plot of land in Batu Kawan for the construction of a 600K sq ft facility, which will be built in phases. For the first phase, the group targets to build a block of 170K sq ft factory by Sept-Oct 2018. Management has said that the new Batu Kawan facility is to cater for additional jobs from its German optoelectronics customer, as well as potential new jobs from prospective customers. With the new capacities, Inari is almost doubling its floor space from FY17. Note that we have not factored in any earnings contribution from its Batu Kawan facility into our profit forecasts.

• All-in, we expect Inari’s earnings to register a robust CAGR of 31% from FY17 to FY20F, riding on 3 core pillars – 1) RF, which benefits from the transition to 5G and rising content per device; 2) laser devices, which is boosted by increasing biometric and augmented reality (AR) applications in smartphones; and 3) LED, which rides on rising demand for high-resolution billboards in shopping malls.

Source: AmInvest Research - 21 May 2018