Investment Highlights

• We reiterate our BUY recommendation on Inari Amertron (Inari) with unchanged forecasts and fair value of RM2.61/share, pegged to a CY19F FD PE of 20x, in line with its 3-year average.

• Inari's FY18 core net profit of RM267mil (+34% YoY) met both our full-year forecast and consensus estimates. The YoY jump was due to the higher utilisation rate for its radio frequency (RF) testers during the year, which was in line with the rising RF content in smartphones. We have adjusted for currency gains/losses for the periods under review.

• 4QFY18 core net profit came in at RM48mil, representing a flat YoY growth, but a 30% decline QoQ owing to higher tax paid during the quarter. On the other hand, 4QFY18 revenue declined 7.6% QoQ due to seasonality, as 3Q was slightly boosted by the production ramp-up of two flagship Korean smartphones.

• Currently, 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 when production ramps up.

• Furthermore, Inari has recently purchased a plot of land in Batu Kawan, mainland Penang, 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. We have not factored in any earnings contribution from its Batu Kawan facility into our profit forecasts.

• Overall, we expect Inari’s earnings to register a robust CAGR of 27% from FY18 to FY21F, riding on 3 core pillars: 1) RF, which benefits from the transition to 5G and rising content per device; 2) laser devices, which are boosted by increasing biometric and augmented reality (AR) applications in smartphones; and 3) LED, which rides on the increasing demand for high-resolution billboards in shopping malls.

Source: AmInvest Research - 29 Aug 2018