This article first appeared in The Edge Financial Daily on April 9, 2020

Inari Amertron Bhd
(April 8, RM1.36)
Upgrade to buy with a lower target price (TP) of RM1.50: Inari Amertron Bhd’s share price has plunged by about 30% from its January peak, in tandem with market correction. Although near-term volatility will likely persist for the second to third quarter of 2020 (2Q-3Q20), medium-term prospects for Inari are brighter and more secured now after its key client, Broadcom, signed multi-year agreements with a US smartphone manufacturer to supply radio frequency (RF) chips up to 2023. 

Inari’s current valuation of 18 times calendar year 2021 (CY21) price-earnings ratio (PER) is also compelling (near -1 standard deviation [SD] of the five-year mean), with potential upside to our earnings forecasts coming from higher-than-expected RF content gains and/or a faster replacement cycle of fifth-generation smartphones. We upgrade our call on Inari to “buy”. While weak quarterly earnings for the near term could be a drag on its share price, we advise investors to accumulate on such weakness. The stock offers a decent net yield of 3% to 4%, backed by its strong balance sheet which is in a net cash position.

Our earnings forecasts are below the consensus as we cut our utilisation rate assumptions to account for weaker end-demand in the near term. Our TP of RM1.50, from RM1.55 previously, is based on 21 times CY21 earnings per share, which is at a premium relative to the Malaysian technology sector’s average given Inari’s leading position in RF. Key risks to our view include a significant slowdown in demand for smartphones that could affect sales for the RF segment. However, the impact may not be as severe due to rising RF content in smartphones. — AllianceDBS Research, April 8