As requested by one of our followers, the report by UOBKH on INARI
Our top pick post election due to expectation of weakening ringgit reported its results yesterday. As expected, revenue should see a decline Q-o-Q but the profit remained solid.
As the report from CIMB tells us,
We learnt that the second phase expansion at P13 had recently been completed. The second phase could add another 250 RF testers, raising Inari’s capacity to 1,200 units. Following completion, P13B plant will be the largest plant in the group with a total manufacturing floor area of 340 sq ft. The group is in the midst of getting production equipment and it expects to start ramping up production from Jul onwards.
We think that indeed it is still a growing company. Expect the price to trade close or breach to its previous high of RM 2.50 (adjusted after bonus issue)
Have a look at the report!
First off, we called for a take profit on INARI and we still maintained that view due to reasons regarding the iPhone X.
Not Recommending a Buy Just Yet
- Apple cutting the iPhone X numbers are an indication that we would likely see a lower revenue for Broadcom toward Apple. INARI is linked closely to the production of smartphone telecommunication chips for Apple devices and we felt that this would affect the revenue soon.
- The $1000 iPhone is a little bit heavy to most users and we think that growth numbers shouldn’t be able to surprise for 2018.
- If you don’t see Broadcom shares declining due to Apple production cuts, we can tell you that Broadcom’s revenue stream is much bigger than only limited to iPhones. Your D-Link wireless routers that you use at home has Broadcom chipsets in it as well.
Frankly speaking when the buy call on INARI was made, we were expecting record breaking revenue growth. Indeed it recorded the best revenue ever at RM375 million. But to be honest we were expecting something close to RM400 million since the iPhone 8 and X is what makes the difference for Q1 2018’s earnings. Apparently it’s not!
We actually fear that Q3 & Q4 2018 revenue would decline and see a negative growth due to lower iPhone production. If margins don’t stick, then it would be bad and eventually registers a lower earnings per share.
Why We Called for an Exit?
I guess we haven’t explained why we called for an exit a couple of weeks ago… Would like to take an opportunity to do so.
- Operation’s Director Selling (Not people from Insas)
If you recall, when the price of INARI flew to RM3.80, insider selling started to happen and usually those directors don’t sell in the previous rally. But this round is a little odd. They stopped selling when the price reached RM3.40 and we think that this is a very good indicator for the time being.
2. Dollar Decline effect
Furthermore, with the dollar decline pressure, we have yet to see huge currency effects on INARI much similar to what we see on other semiconductor companies.
3. iPhone X Production Cuts
Days before the major correction we see in US, we saw the news on Apple cutting production (here). Apparently we think that this would affect the stock negatively but at that particular moment, INARI opened stable. We chose to take profit then.
What to do Going Forward?
- Sit & Wait Approach
We think that the bonus issue would still see the stock trading stronger than the rest of the market. We suggest that you can wait for the ex-date and sell immediately once you’ve receive the bonus shares in the next 3 days. We believe plenty would be in a hurry to sell to cash out.
2. Sell Now
If you think that the chart is turning down, indeed you can sell now. Over the pass two weeks, volume had soften, MACD had turned down and OBV is on a lower lows trend. Basically technical recommendation shows that a correction might be coming. But of what magnitude? We have to find out along the way.
In conclusion, we think that it would take sometime before we recommend this again. Seemingly the premium to pay is quite high and as usual for Malaysian markets, post bonus issue, shares trade weak for awhile. We shall revisit then.
If you have a fat profit… Just sit on it! (I think you do). Not a time to be brave!
What wasn’t said had already been said by the stock price that flies this morning. It is easy to read when quarterly reports post higher revenue and higher profit where there’s no argument to be made clear unlike the TUNEPRO review (< click for link) that we posted earlier.
Although this is the record quarter for Inari, we think that it is not over for the obvious fact that Q1 2018 which ended in September 2017 doesn’t factor in the iPhone X yet. The teardown for the latest iPhone X has already been done and I count 3 parts in the preliminary teardown.
Broadcom BCM59355 wireless charging controller
Broadcom AFEM-8072, MMMB power amplifier module
Broadcom touch screen controller, labeled BCM15951B0KUB2G.
Not sure how these parts contribute to INARI but the whole list isn’t detailed yet in this teardown.
Meanwhile, here is a report from CIMB on Inari Amertron
Well the biggest benefit definitely goes to Inari Amertron (INARI) but of course we are unsure how many parts would Broadcom be involved in until someone tears down the iPhone X.
Broadcom recently stated that there would be a 40% in blended content in the new iPhone model. The non-RF components are expected to be taking place such as wireless charging and touch controller. This would not benefit Inari Amertron which specializes in RF Chips.
It looks like this time around, the retina scanning module by Inari would not make it into the new iPhone.
Globetronics (GTRONIC) on the other hand might see a better gain in revenue spike from the new iPhone. Light and gesture sensors equipped on the new devices would paved the road for the company. 3D sensors that are coming into the market in 2018 would see a new revenue stream with higher margins for GTRONIC.
The launch of iPhone 8 and iPhone X came out together but the only the iPhone 8 is available for pre-order. We felt that this would lag iPhone suppliers by around a month or so before it register true sales numbers.
Customers would love to compare both before buying and pre-orders for iPhone X to begin only in Oct 27. Foresee that most suppliers to remain weak for September and October. We expect iPhone 8 not to register good numbers even though the selling price is much cheaper than the iPhone X. Commonly, iPhone buyers are not price concern and doesn’t seem to prefer anything secondary to the top product.
The approach is simple now, if you are still holding to any iPhone based suppliers be sure to be holding on to it. If you are looking to jump in and leverage on what we think is one of Apple’s best product in years, fell free to buy on market weakness in the next two months or so.