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Inari Amertron Berhad (INARI) - Public Invest Research initiates INARI with a target price of RM3.80

Inari Amertron Berhad (INARI) - Key Beneficiary of 5G Rollout

After two consecutive years of earnings decline, Inari is poised for a strong comeback in FY21, as we expect it to benefit from the deployment of 5G wireless technology with more RF contents to be included in 5G devices. Inari has recently increased its number of SiP lines to 22, from the initial 8 lines, in order to cater for the strong volume loading. Its new JV with PCL Technologies also serves as another prong of growth to the Group, underpinned by the adoption of 400G Ethernet ports. With that being said, we forecast a CAGR of 32.1% on Inari’s FY20-23F earnings. We initiate Inari with an Outperform call, with a TP of RM3.80. We derive our TP based on a PE multiple of 42x, which is c.15% premium to its local peers’ average. We deem the premium multiple justifiable, given its multiple prong growth strategy that will support the Group’s near to medium term outlook.

Closest proxy to 5G. We believe Inari will greatly benefit from the transition to the emerging 5G technology, given that the wireless technology evolution will result in higher number of frequency bands supported by 5G devices, which in turn, increases the need for more RF filters to be fitted. Inari provides assembly and testing services to its long- time customer, Broadcom for the latter’s premium FBAR filters. We highlight that Inari has installed a total of 22 SiP lines currently, from 8 lines initially. Its RF segment is expected to flourish, considering the overwhelming demand for the US-based smartphone maker’s latest 5G model. We opine that the wireless component supply agreement signed between Broadcom and the US phone smartphone maker also helps to provide clarity to Inari in the short to medium term.

New JV to start bearing fruit. Inari’s 30%-owned JV with the Taiwan- based PCL Technologies will be focused on producing optical transceivers with transfer speeds up to 400Gbps, which is 4x the speed of current optical transceivers used in data centers. The growth of the optical transceiver market will be underpinned by the adoption of 400G Ethernet ports as well as data center growth. The new venture has made its first shipment in June 2020 and we also expect to see positive contribution from this JV to the Group in FY21

Valuation. We initiate coverage on Inari with an Outperform call, ascribing a PE multiple of 42x on its CY21F EPS of 9.1sen per share.  The 42x multiple implies c.15% premium to local peers’ average. We deem the premium justifiable, considering (i) its strong 3-year earnings CAGR of 32.1%, (ii) closest proxy for 5G growth, and (iii) its exposure to the growing optical transceiver space.
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