Investment Highlights

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

• During Inari's analyst briefing yesterday, management reiterated that the group is working with its German customer to develop several new products. First, the group is fitting in equipment to produce fine-pitch LED (<2mm pixel pitch) used for billboards and other public display panels. Second, its Inari Optical Technology (IOT) division would be producing a health sensor, as well as vertical-cavity surface-emitting laser (VCSEL) components for both 2D and 3D sensing applications. These are used in smartphones (camera, facial recognition, augmented reality, etc.).

• We believe meaningful earnings contributions from the new products will start showing in 6–9 months’ time. Initially, raw materials will be consigned to Inari for processing. After 3–6 months of observational period, if volume picks up, Inari would start purchasing raw materials for its customer. This allows the group to book higher revenue due to a higher bill of materials (BOM). The new products, if fully ramped up, can generate more revenue than its bread-and-butter RF business.

• Management also reaffirmed plans to consolidate operations to improve efficiency. To this end, the group is relocating its Philippine 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 also intends to relocate operations in its P8 plant to P13 as both are producing RF components. Collectively, we believe the group will be able to save labour cost and rental expenses of >RM500K/month (c:2% of FY19F earnings) from the exercise.

• Inari has recently purchased a plot of land in Batu Kawan for the construction of a 640K sq ft facility, which will be built in phases. For the first phase, the group targets to build a block of 200K 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. 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 - 24 May 2018