Rollout of 5G to boost Inari Amertron prospects, says UOB Kay Hian

What you see in the Samsung Galaxy S10+ is a decade of work that

KUALA LUMPUR: Inari Amertron will benefit from the roll-out of the 5G network and infrastructure, UOB Kay Hian Malaysia Research says.

It said on Friday that although FY19 will be a transition year for Inari for both its existing and new businesses, the group’s medium-term outlook remains promising, underpinned by 5G.

“Besides new 5G smartphones (on multifold increase in RF filters), Inari will also benefit from the inevitable growth in 5G infrastructure with its expertise in fibre-optics chips and optoelectronics. Any share price weakness presents buying opportunity. Maintain Buy.  Target price: RM1.80,” it said.

UOB Kay Hian Research said while Inari’s utilisation rate for RF testers (42% of group revenue) is only hovering at 60-65%, the group remains committed to its key customer’s capacity expansion plan (testers are consigned by this key customer) which will see additional testing capacity being added by 2019. 

“We are particularly positive on this as this implies that Inari’s RF customer is expecting a significant uptick in RF demand, likely from the imminent convergence of 5G, which would also directly benefit Inari given its niche-services in this space. 

Samsung’s latest introduction of the Galaxy S10 (5G) kick-started the 5G wave, and other premium smartphone brands will have to follow suit by introducing 5G phones either by this year or latest by next year, despite 5G telecommunications infrastructure still being at its infancy stages. 

While 5G phones could have a marginal earnings impact on Inari at the early stages (due to the phones’ high price points), the group’s major customer continuously consigns RF testers to Inari despite the current low utilisation rate of testers at 60-65%.

This suggests this major customer could be anticipating a sharp uptick in RF filters requirements once 5G takes off, which will require a multifold increase in RF filters for smartphones.

UOB Kay Hian Research said aside from Samsung, the US and Chinese premium smartphone players would be following suit and this would also lend strength to Inari’s RF demand. 

Besides a multiple-fold increase in RF filters expected in the new 5G smartphones, Inari will also benefit from the inevitable growth in 5G infrastructure with its expertise in fibre-optics chips and optoelectronics.

The research house said time was needed for its new business with a German customer. 

“For its existing operation, Inari’s new products ramp-up for this customer,  that is, 2D and 3D FR sensors, health sensors, and mini LEDs are still on modest volume. 

“With the recent takeover talks by private equity firms alongside lower earnings forecast mentioned in an ad-hoc statement by this customer, we also do not discount the potential slowdown in the new business development between Inari and this customer. 

“Note that Inari now expects to obtain the new P34 plant’s (680,000sf) certificate of completion and compliance (CCC) in June 2019 (instead of expediting by April 2019), with the exact timing for the commencement of production still in discussion at the moment. 

“All said, we believe Inari is the frontrunner to benefit from the outsourcing model by this customer should the latter adopt such modus operandi to boost its margins,” UOB Kay Hian Research said.