Investment Highlights

• We maintain our BUY call on Inari Amertron (Inari) with an unchanged forecasts and fair value of RM2.61/share. Our FV is based on CY19F PE of 20x.

• During Inari's analyst briefing yesterday, the company guided that the mini-LED (<2mm pixel pitch) has been qualified by its German customer and has commenced production in its P21 plant, albeit in a small volume.

• In regards to its Inari Optical Technology (IOT) division, the facial recognition sensor for an upcoming Chinese flagship smartphone has been qualified by its customer while the health sensor is still in the qualifying stage. Both of these will be relying on the vertical-cavity surface-emitting laser (VCSEL) technology. We expect meaningful earnings contribution to kick in after 6 to 9 months.

• Inari’s bread-and-butter radio frequency (RF) business has continued to grow steadily. As of May 2018, it has 970 testers (+24% YoY) in its P13 plant in Penang, which is occupying almost 90% of the floor space. Furthermore, the company expects gradual increase in RF testers underpinned by 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 forward, RF content growth is expected to be fuelled by the transition from 4G LTE to 5G.

• The relocation of its Philippine operations in Paranaque (PQ) to existing plants in Clark Field (CK) has been completed. The move will allow for some 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 by the end of September 2018 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.

• For the upcoming 640K sq ft factory in Batu Kawan, the group targets to have the first phase of 240K sq ft completed by Sept-Oct 2018, followed by the remaining second and third phases by May 2019. The new facility is to cater for additional jobs from its German optoelectronics customer, as well as potential new jobs from prospective customers. 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 are 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 - 30 Aug 2018