We are positive on the JV with MIT Semiconductor to develop OSAT equipment. Initial stage involves customising equipment for internal use followed by IP protection filing. This allows Inari to sell equipment to external OSAT as part of its effort to diversify revenue stream and move up the value chain. No guidance yet but we expect meaningful contribution to materialise only in 1-2 years owing to lengthy development process. Immediate drivers are: (i) c.75% increase in RF filters per handset, (ii) a long overdue (c. 4-5 years) phone replacement cycle, and (iii) broadening exposure in the data centre space. Maintain OUTPERFORM with an unchanged target price of RM2.50.

Forming JV with Singapore-based MIT Semiconductor. Inari Amertron (Inari) announced yesterday that it has via its wholly-owned subsidiary Inari Matrix Sdn Bhd (IMSB) entered into a subscription and shareholders’ agreement with MIT Semiconductor Pte Ltd (MIT) to set up a joint venture (JV) entity.

Venturing into OSAT equipment. The JV allows for synergistic collaboration which Inari with its long history and broad experience in operating outsourced semiconductor test and assembly (OSAT) businesses will be able to tap into MIT’s expertise and technical know-how in manufacturing OSAT equipment. For the initial stage, the JV will focus on developing customised equipment for Inari’s consumption. Potential equipment includes handlers used in the OSAT space for processes such as flip chip, electromagnetic interference (EMI) shielding and copper pillar replacement.

JV to diversify revenue stream. Inari also plans to pursue intellectual property (IP) protection upon getting qualified by potential customers. This will allow the group to sell equipment to external OSATs. We are positive on this JV as it is in line with the group’s long-term effort to diversify revenue stream and reduce reliance on current key customers. Management has yet to provide any guidance on the potential contribution but given the lengthy process of equipment development and IP registration process, we expect meaningful contribution only in 1-2 years.

The proposed capital injection by IMSB (51%) and MIT (49%) is RM16.8m. IMSB’s investment commitment is RM8.6m which will be funded internally by Inari. Operations will be carried out in the P34 plant in Batu Kawan.

RF to drive immediate growth. Meanwhile, the radio frequency (RF) space is poised for a massive upcycle with the adoption of 5G in handsets. With the need for c.75% more RF filters per handset, Inari has added 8 more systems in package (SiP) assembly lines for RF in its P34 plant, in addition to the existing 8 lines in its P13 plant.

We keep our FY20E and FY21E NP of RM140.4m and RM240.9m, representing growth of -27% and +72%, respectively. We expect the softness in smartphone shipment to end in FY20, followed by a massive upcycle of 5G adoption in FY21.

Maintain OUTPERFORM recommendation and Target Price of RM2.50 based on CY21 PER of 30x (representing +1SD above its 3-year mean) considering Inari being the purest proxy to 5G adoption in the US flagship smartphone.

Risks to our call include: (i) less aggressive orders from its key customer, (ii) delay in 5G rollout, and (iii) higher-than-expected input costs.

Source: Kenanga Research - 19 Aug 2020