Investment Highlights

• We reiterate BUY on Inari Amertron (Inari) with unchanged forecasts and fair value of RM2.50/share, pegged to a CY19F FD PE of 20x.

• Inari's 3QFY18 core net profit came within our expectations and consensus at RM70mil, which represents a YoY jump of 83%, but a QoQ decline of 12%. This brings 9MFY18 core profit to RM218mil (+68% YoY), accounting for 79% of both our full-year forecast and consensus estimate. Note that we have adjusted for currency gains/losses for the periods under review.

• We believe the strong 3Q performance stemmed mainly from the production ramp-up of two flagship Korean smartphones, which also comes with increased radio frequency (RF) content. As a result, 3QFY18 revenue was up 19% YoY in spite of the weaker USD against the ringgit. According to Bloomberg, the USD/MYR averaged 3.9248 in 3QFY18 vs. 4.4463 in 3QFY17 – a 12% depreciation in the USD. On the other hand, 3QFY18 revenue declined 13% QoQ owing to seasonality, as 2Q was boosted by the launch of a flagship American smartphone.

• Earlier, Digitimes reported that a prominent American smartphone maker could begin trial production of its new flagship models as early as June 2018. The objective is to avoid a low yield rate of 3D sensor modules, which caused a delay last year. If this happens, we could see a sequential pickup in Inari’s earnings for 4QFY18.

• 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.

• Moving forward, 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 - 23 May 2018