This article first appeared in The Edge Financial Daily on March 10, 2020

Inari Amertron Bhd
(March 9, RM1.29) 
Maintain hold with a lower target price of RM1.55: Inari Amertron Bhd’s plans to utilise its P34 plant remain, although a volume ramp-up for its German customer is still low as a restructuring continues to cause delays in the line-up of new products. While its near-term prospects are challenging, Inari Amertron will benefit from the fifth-generation (5G) commercialisation with its expertise in fibreoptic chips and optoelectronics alongside a higher radio frequency (RF) content in new-generation smartphones.

While October to December is typically a stronger quarter on a higher ramp-up of RF products for new and facelift US flagship smartphone launches, Inari Amertron’s earnings were weaker with revenue and net profit dropping 16% and 32% quarter-on-quarter (q-o-q) respectively. 

The management attributed the softness to slower sales from the optoelectronic segment, with sales from Inari Amertron’s operations in Kunshan, China and Clark Field, the Philippines dragged by a much slower demand from the automotive and industrial segments. 

Its net margin corroded further by 3.9 percentage points q-o-q to 11.4% on lower operational efficiency and higher depreciation cost. While this is below its five-year average core net margin of 15%, it is still the highest among local outsourced semiconductor assembly and test players.

Touching base on the Covid-19 impact on Inari Amertron’s Kunshan operations, the management highlighted mobility restrictions in China further exacerbated its already weak operations by slowing global automotive sales. Its operations were shut for another week, on top of a one-week festive season holiday. 

While Kunshan operations contributed only 10% of the group’s revenue, we reckoned any labour shortages, hence lower operational efficiency, could further corrode margins. 

All said, the management remains hopeful that April and May — the fourth quarter of the financial year ending June 30, 2020 (4QFY20) — could see a pent-up recovery for an urgent shipment as orders were only pushed back instead of being cancelled.

The 5G commercialisation remains a key catalyst for Inari Amertron’s RF segment. Samsung’s introduction of the Galaxy S10 (5G), with the recent launch of S20, kick-started the 5G wave, implying other premium smartphone brands will have to follow suit by introducing 5G phones latest by this year despite the 5G telecommunications infrastructure still at its infancy stage. 

While 5G phones could have a marginal earnings impact on Inari Amertron at early stages due to the phones’ high prices, Broadcom Inc continuously consigning RF testers to Inari Amertron suggests exponential growth for RF filter requirements once 5G takes off.

Our financial year ending June 30, 2020 (FY20) and FY21 net profit estimates for Inari Amertron are reduced by 13%, reflecting a weaker second half of FY20 and 2% respectively to account mainly for a lower utilisation rate at its RF segment and lower optoelectronic sales from Inari Amertron. 

Downside risks include a slower demand from end-product clients, a protracted restructuring of its German customer and a main customer losing ground in 5G market dominance. — UOB Kay Hian, March 5