We recently met up with management which highlighted that the RF and sensor businesses are likely to remain soft near term. The stock price has, however, corrected by 14% over the past 3 months and bad news is likely to have been priced in. We would gradually increase positions in Inari in advance of the 5G rollout, which we see as around the corner and with Inari poised to be a key beneficiary. We reaffirm our BUY call but with a lower target price of RM1.89.

Lined Up for More RF Work

Operating at 60-70% utilisation levels, prospects for the RF segment could be better, if not for the current weakness in end demand for the major smartphone brands. Nevertheless, because of the growth in content and a steady increase in testing equipment, we are of the view that FY19E RF revenue will not see any decline. Moreover, this has not deterred Broadcom from consigning more RF testers, which is approaching the 1,000 unit mark and expected to close nearer the 1,100 units by end FY19. We firmly believe that Broadcom is anticipating a sharp uptick in RF filters once 5G takes off, which will require a multiple fold increase in filters for the same device. Meanwhile, we understand that Inari is preparing the test protocols for this next evolution, bracing for the next upturn.

Osram Sensor Business Waiting to Kick Off

Of the 15m unit/month capacity, the sensor segment is currently pushing out 6m units/month comprising 4 different smartphone sensors relating to biometric identification and health. This is nevertheless half of last year’s production volumes when the IRIS sensor was operating near full capacity. There could potentially be production volume upside by 2Q CY19 should there be greater adoption of these sensor across its end customer’s product portfolio. Likewise, the mini LED business is running close to 20m units/month and is ready to scale up.

Reaffirm BUY Rating With Lower Target Price of RM1.89

We cut our FY19-21E EPS by 6-19% to reflect the current RF weakness. Thus, we lower our 12-month TP to RM1.89 (from RM2.25), based on an unchanged 24x CY19E EPS. We reaffirm our BUY call on Inari, a Daiwa top tech pick on the 5G ramp theme (see 2019 Tech outlook, 7 January 2019). Downside risks: customer loss and weak demand for smartphones.

Source: Affin Hwang Research - 13 Feb 2019