Investment Highlights

• We maintain our BUY recommendation on Inari Amertron (Inari) with a higher fair value of RM2.61/share (vs. RM2.50 previously). Our valuation is pegged to a CY19F PE of 20x, in line with its 3-year average.

• We have revised our FY19F and FY20F earnings marginally upwards by 4.1% and 4.2% respectively after factoring in a slightly higher utilisation rate for its radio frequency (RF) segment. We believe that the segment will continue to grow sturdily on the back of rising RF content in smartphones, which is needed to facilitate the transition from 4G LTE to 5G.

• Aside from that, Inari is working with its German customer to develop several new products – (1) fine-pitch LED (<2mm pixel pitch) used for billboards and other public display panels; and (2) health sensor as well as vertical-cavity surface-emitting laser (VCSEL) components for both 2D and 3D sensing applications.

• We believe meaningful earnings contributions from the new products will start showing in 6–9 months’ time. For now, raw materials are being 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 potentially 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 is currently building a 640K sq ft facility in Batu Kawan. The first phase comprising a 200K sq ft factory is set to be completed by Sept-Oct 2018. This new 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.

• Overall, Inari is set to register a robust earnings 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 - 25 Jul 2018