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    We believe the emerging 5G transition will be a boon to Inari. With the recent doubling of the capacity of its SiP assembly line and ample RF testers, we expect Inari to see a repeat super growth cycle.
    To boot, the recent JV with PCL will also give it a hand in the fast growing optical module market.
    Concerns over Osram’s new owner ams and consolidation of the supply chain are overplayed, in our view. There are synergies in the form of access to new customers, product portfolio and market segments.
    On the back of a FY19-22E EPS CAGR of 22% and improved risk reward, we raise our TP to RM3.07 based on a PER of 35x on CY21E EPS. Inari remains a top sector and country pick. Maintain BUY.

Prepped and ready for 5G

We see the transition to 5G as a key catalyst to Inari’s earnings over the near term. Driven by an increase in the number of frequency bands and the Sub 6 wavelength, there will be a need for its customer’s unique RF filter. Inari has been preparing itself for this growth, building its test capacity and more recently doubling its SiP assembly line.
Benefits expected to start flowing in from joint venture

The recent collaboration with PCL also opens the door to the fast growing optical module market. Industry growth is expected to be underpinned not merely by datacentre growth but also 5G base stations. Switch port migration from 40G to 100G will be an additional demand driver. We expect maiden earnings contribution at the associate level in FY21E.
Ramping-up of plant P34 and new customers

Separately, we are positive on several other developments which will help fill its 680k sf plant P34. Swiss-based Comet Group’s production line was set up recently, allowing Inari to move into module testing for a front-end semi manufacturer.
Maintain BUY with a higher 12-month TP of RM3.07

The target price is raised to RM3.07 based on a higher target PE of 35x (to reflect a likely strong 3-year forward earnings CAGR of 22%, largely underpinned by the 5G cycle; previously 26x) on the CY21E EPS. After 2 years of earnings contraction, we see upside risk to earnings as 5G penetration proliferates. Maintain BUY.

Source: Affin Hwang Research - 30 Jul 2020

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