Investment Highlights

• We maintain our HOLD recommendation on Inari Amertron (Inari) with a lower fair value of RM1.69/share (previously RM1.76/share), pegged to a CY21F PE of 17.5x. Our PE assumption represents a premium to regional peers’ 1-year forward PE of 14x largely to reflect Inari’s scarcity premium as a more significant perceived Apple-proxy listed on Bursa Malaysia.

• We tweak our FY20F–FY22F earnings forecasts downwards by 3–6% to account for lower contribution expected from its Kunshan operations in China due to factory shutdown relating to the coronavirus disease (Covid-19) outbreak. Inari’s Kunshan factory produces LEDs and optoelectronic products.

• Inari’s 2QFY20 core profit of RM31mil fared beneath expectations, bringing 1HFY20 core profit to RM80mil. This is after excluding one-off net gains amounting RM5mil mainly from reversal of inventories which were offset by forex losses. The 1HFY20 results account for only 34% of our full-year estimates and 38% of consensus’ estimates.

• 1HFY20 core profit plunged 31% YoY mainly due to: (i) 7% lower revenue mainly due to lower optoelectronics and fibre product sales; (ii) changes in product mix which we believe are due to lower utilization rates for its aforementioned products impacting margins; and (iii) less favourable forex rates.

• Gartner’s press release on 28 January 2020 forecasts global smartphone sales to increase 3% in 2020 to reach 1.57bil units, after declining 2% in 2019. The rebound will be driven by the introduction of 5G network coverage in more countries and as users who have delayed their smartphone purchases in anticipation of reduced prices begin buying again. We believe that some of the growth will also come from users who are holding back purchases to buy 5G phones. Gartner forecasted 5G phones to account for 12% of overall mobile phone sales in 2020, expecting it to more than double in 2021. This bodes well for Inari’s radio frequency (RF) division. However, we note that the recent Covid-19 outbreak had not been accounted for in Gartner’s forecasts.

• Covid-19 has had an immediate impact on Inari’s Kunshan factory which was shut down over the extended Lunar New Year Holiday and delayed resuming operations by 2 weeks to 17 February 2020. Meanwhile, no impact is seen for its Malaysian and Philippine operations.

Source: AmInvest Research - 26 Feb 2020