Investment Highlights

• We maintain our BUY call on Inari Amertron (Inari) with unchanged forecasts and fair value of RM2.78/share, pegged to a CY22F PE of 28x. This is in line with our benchmark target forward PE for outsourced semiconductor assembly and test (OSAT) companies with a 20% premium above 3-year historical forward PE of 23x as prospects brighten due to innovations such as 5G, 3D sensors, and electric vehicles, which progress has been accelerated by Covid-19.

• Inari’s 1QFY21 results came in within expectations, recording a core profit of RM70mil, after excluding a RM0.1mil one-off gain as PPE disposal gains offset unrealized forex losses. The results accounted for 27% and 30% of our and consensus’ full-year estimates respectively, which we consider in line as 1H results for the past 3 years have been seasonally stronger for the group due to the product launch cycle of its end customer’s products.

• YoY: 1QFY21 core profit surged 43% due to: (i) a 10% rise in revenue on higher volume loading of its products which we believe is driven by growth for its radio frequency (RF) business; (ii) 4ppt higher EBITDA margin of 29%; (iii) a lower effective tax rate of 10% (vs. 13% in 1QFY20) due to the reversal of provision for deferred tax.

• QoQ: 1QFY21 core net profit soared 68% in tandem with a 49% revenue increase driven by higher volume loading due to higher seasonal demand for its RF business on top of recovering demand amid the Covid-19 pandemic.

• Outlook: Inari anticipates the strong momentum of its RF business to continue for the coming quarters in FY21F amid the launch and growth in 5G phones which require additional RF components compared to 4G phones.

The group previously shared its expansion plans for its RF business, raising its total system-in-package (SiP) lines to 22, a 2.75x increase compared to FY20’s 8 lines driven by strong RF demand as mentioned above. Inari will work to improve its production capacity for RF to meet the strong demand, while improving utilization of its optoelectronics business and others.

• We continue to like Inari due to its role as a proxy for the growth of 5G through its RF business, despite caution relating to the Covid-19 pandemic. The group’s positive prospects arise due to: (i) the resilience of its RF earnings due to higher chip complexity in 5G phones; (ii) potential growth in laser devices from more biometric and AR applications; and (iii) its efforts to enhance and diversify revenue streams.

Source: AmInvest Research - 25 Nov 2020