Inari Amertron (INRI MK; BUY; TP: MYR2.70) - A MY sector powerhouse
- Further re-rating supported by superior visibility. We expect another record year in earnings delivery by Inari in FY6/17, with strong YoY growth for the sixth consecutive year. This momentum should spill over into FY18, backed by (i) resilient RF demand, in line with progressive adoption of LTE-A/5G and (ii) surge in IR LED to power the iris scanner application in new smartphones. As such, we up Inari’s TP to MYR2.70 (+10%), pegging it to 20x CY18 EPS (from 18x), representing a 10% premium to our target PER peg for Malaysian listed technology companies within our coverage for its superior visibility. BUY.
- Expect a strong finish to FY17. We expect Inari to report a net profit of MYR57m-63m (+22%-34% QoQ) in the upcoming 4QFY17 results, due out on 22 Aug, lifting FY17 net profit to MYR214m-220m (+37%-41% YoY). We expect the sequential quarterly earnings growth to be anchored by the RF division as demand picks up, leading up to the launch of three major premium smartphones in 3QCY17. In addition, a full-quarter contribution from its IR LED division at high volume could generate a handsome profit addition for the group. Recall that the IR LED is a key component in the iris scanner which has featured in the premium smartphones launched in April 2017.
- Earnings visibility backed by faster GSS growth. Monthly global semiconductor sales (GSS) strengthened for the 4th month in a row, growing 2% MoM, 24% YoY to USD32.6b in June, alongside seven consecutive MoM growth in global semiconductor equipment billing (+1% MoM, +33% YoY), albeit at a tapered pace. This is within our expectation highlighted in our 2H17 Strategy note (dated 7 July), for semiconductor equipment billing growth to taper in 2H17 as the bulk of the necessary capex has been spent in 1H17. Instead, capex spent should pave the way to even stronger semiconductor sales growth in 2H17 thus premising our switch of preference to semiconductor players such as Inari.