Inari Amertron (INRI) will benefit from Osram Licht’s (Osram) strategy to place heavy emphasis on 3D sensing and μLED, to drive growth over the next 3 years, according to Macquarie Equities Research (MQ Research) in its report dated 21 September 2018. Further, other tailwinds are picking up, involving the iPhone Xr and Huawei’s 5G flip-phone.

MQ Research reiterates buy on weakness and maintains an Outperform rating on INRI.

Market and Tech Day Takeaways

• Osram presented its technological and business strategies going forward. MQ Research is positive given the heavy emphasis on 3D sensing and μLED (market size +15% compounded annual growth rate (CAGR) by FY23) to drive growth over next 3 years. INRI provides key manufacturing competencies for both and will be critical for Osram to scale quickly going forward, while also supporting rising package complexity.
  • 3D sensing – Looking beyond iris scanners, Osram will leverage its broad portfolio of IR solutions, coupled with recently acquired vertical-cavity surface-emitting laser (VCSEL) technology, to break into 3D sensing. It is targeting tier1/tier2 Asian smartphone makers, initially for their low-volume high-end models.
  • μLED – launching MiniLED videowall product in FY19, targeting <10μm LED by 2020 for even higher resolution solutions. Future applications: microdisplays for near-eye projection.

Other Tailwinds

• Potential surprise to iPhone volumes – MQ Research’s channel checks say assemblers in Apple’s supply chain working employees overtime to stay on-track to meet iPhone Xr shipments. While volume growth is not a key multiplier, MQ Research sees this as positive for INRI as Broadcom (AVGO US, US$241.79, Neutral, TP: US$250.00) has high-band radio frequency (RF) components in the phone.

• Huawei’s 5G flip-phone, est. by mid-2019 – While Apple is central to INRI’s outlook, MQ Research believes more attention should be paid to the diversification into the supply chain of other smartphone makers: Huawei is now #2 globally. MQ Research anticipates film bulk acoustic resonator (FBAR) tech is key (for high and ultra high bands) to deliver 5G’s promised 100x faster speeds vs 4G. MQ Research also anticipates the new flagship may boast facial recognition features, which plays into INRI’s optoelectronics segment via Osram.

Earnings and Target Price Revision

• No change.

Price Catalyst

• 12-month price target: RM2.90 based on a price-to-earnings ratio methodology.
• Catalyst: Higher RF utilisation, ramp-up of Osram capacity, earnings beat.

Action and Recommendation

• Reiterate buy on weakness. LT growth drivers outweigh ST slowdown. Maintain Outperform with target price of RM2.90.

Source: Macquarie Research - 1 Oct 2018