KUALA LUMPUR (July 27): Kenanga Research has initiated coverage on Inari Amertron Bhd, assigning the tech company an “outperform” call with a target price (TP) of RM2.50.

In a note, the research house’s analyst Samuel Tan said this TP was based on a calendar year 2021 (CY21) price to earnings (P/E) ratio of 30 times, representing one standard deviation above its three-year mean.

At current levels, Tan noted that Inari was trading at a CY21 P/E ratio of 21.9 times, an “ungrounded discount” to its peer’s average of 27 times, based on Bloomberg consensus.

He expected Inari’s net profit for its financial year ending June 30, 2020 (FY20) to contract by 28.8% to RM140.4 million, then grow by 71.26% to RM240.9 million for FY21.

According to him, Inari’s radio frequency (RF) segment is due for a massive upcyle with the adoption of 5G in an upcoming US flagship smartphone, as its key customer has secured a three-year US$15 billion deal to continue supplying wireless components to the US smartphone maker.

RF filters per handset is expected to jump by around 75%, to maintain a healthy signal to noise ratio (SNR), especially when incorporating higher frequency bands.

In anticipation of higher loading volume, Inari is adding eight more system in package (SiP) assembly lines for RF in its P34 plant in Batu Kawan, in addition to the existing eight lines present in its P13 plant in Bayan Lepas. Both of these are in Penang.

“With the top three active US smartphones in circulation still comprising four- to five-year-old models such as the 7th gen (2016), 6th gen (2015) and 8th gen (2017). These models are likely experiencing hardware bottlenecks and end-of-life support for new operating systems (OS) which would result in less-than-optimal user interface (UI) experience,” Tan said.

Thus, he expected that the 2020 model would likely be the preferred phone by customers seeking a future-proof upgrade.

“In addition, the new 14th gen OS will bring about long-awaited features (eg. widgets, picture-in-picture and app library) which [are] expected to be very well received and could potentially win over market share from the Android user base,” he added.

He added that with 5G demanding more frequency bands on the consumer front, back-end data centres are seeing the need for faster wired connections among servers in order to deliver content at 5G speeds.

Inari is aiming to manufacture optical transceivers capable of transfer speeds of up to 400 gigabits per second (Gpbs), four times the speed of current transceivers used in data centres.

“Contributions are expected to kick in in FY21, in tandem with the market’s transition to 400 Gbps as global deliveries for 100-200Gbps ports are expected to peak in 2020,” he said.

At 11.44am, Inari’s share price dipped 1 sen or 0.55% to RM1.82 apiece, valuing the company at RM5.89 billion. Some 4.78 million shares were traded.