This article first appeared in The Edge Financial Daily on October 17, 2017

Inari Amertron Bhd
(Oct 16, RM2.78)
Upgrade buy call with a higher target price (TP) of RM2.90: Inari Amerton Bhd’s revenue could double in three year’s time, particularly given the opportunities to grow its business with Broadcom Ltd (on commercialisation of 5G networks in 2019 which will spur demand growth in the radio frequency [RF] segment) and hopefully on its penetration into Germany’s Osram Licht AG’s other business segment as this customer’s new fab plant in Kulim, Malaysia, is slated to open by the end of next month.

We pencil in a revenue growth of 60% in our financial year 2017 (FY17) to FY20 forecasts, suggesting a potential upside to our forecasts, particularly for FY19/20.

Inari’s latest business segment involving assembly and testing jobs for iris scanners started commercial production in the fourth quarter of FY17 (4QFY17). It contributed negligible sales in FY17 but sales contribution is expected to grow to 10% of total sales in FY18 on a capacity ramp-up.

While Inari is still in the mode of ramping up its capacity for iris scanners, it is also actively researching facial recognition with its client, preparing to ride on future trends in biometric authentication.

Inari’s bread-and-butter radio frequency (RF) segment contributed about 50% of FY17 revenue. Inari has just added another 85 units of RF testers, bringing the total to 850 units.

Inari could continue to see strong loading volumes in the RF segment in the next two quarters, boosted by its US end-client’s new smartphone models.

Our positive view is further supported by Broadcom’s comment in its conference call on the announcement of its 3QFY17 results, which indicated that it expects strong revenue growth in the wireless segment in 4QFY17 and that revenue momentum could be sustained into 1QFY18.

We estimate Inari’s sales from the RF segment to grow 8% to 13% per annum from FY18-19.

The Philippines operations, which mainly cater to lower-margin legacy products, have room for margin improvement. Inari had constructed a new CK2 plant (floor space: 90,000 sq ft) in Clark Field, the Philippines, which is adjacent to its existing CK plant.

Inari is looking to consolidate its operations in Paranaque and Clark Field to improve operational efficiency.

We upgrade to a “buy” call with a higher TP of RM2.90, pegged to an unchanged 18 times (+1SD [standard deviation]) price-earnings ratio, but we roll forward our valuation to calendar year 2019 (previously 2018F).

It is our view that the +1SD valuation is justifiable, given Inari’s solid earnings visibility (net profit compound annual growth rate of 21% in FY17-20F) with a potential upside to our forecasts for FY19/20.

Inari continues to have one of the strongest revenue prospects among Malaysia’s local outsourced semiconductor assembly and test companies, given its dominant position in its clients’ supply chain for the products that it is focused on. — UOB Kay Hian, Oct 16