Investment Highlight

• We maintain BUY 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. Prospects are brightening due to innovations such as 5G, 3D sensors, and electric vehicles, which progress has been accelerated by Covid-19.
• Key takeaways from Inari’s 1QFY21 conference call:
  • Results summary: Inari’s 1QFY21 core profit of RM70mil was its highest ever quarterly PAT, rising 43% YoY due to higher radio frequency (RF) revenue driven by stronger demand of components in 5G smartphones and as its newly-installed system-in-package (SiP) lines were fullyutilized. Furthermore, the group benefitted from a reversal of provision for deferred tax.
  • Update on RF capacity expansion: Five additional SiP lines are being installed from mid-October to early December 2020, bringing total SiP lines to 22 (2.75x increase YoY). To date, lines 9, 10, and 11 have been in full production since end-September 2020 while the remaining three lines will start production in December. Inari also shared that order visibility has extended up till March 2021 (6 months, vs. 3 months previously) and expects the strong momentum of RF orders to continue, with expectations that FY21F RF revenue might contribute 60–65% of the group’s total revenue.
  • Optoelectronics and generic business outlook fairly unchanged: The outlook for automotive and industrial electronic products has seen slight improvements albeit still on a spot order basis due to challenging market conditions. Meanwhile, higher demand for fiber optic products, particularly for chip-on-carrier (CoC) solutions, continues to be seen.
  • Continuing customer diversification and increased partnerships: Inari’s Hong-Kong based customer in Clark is in the midst of assembling front-end assembly lines, while a Swiss-based customer at P34 is working on a submodule assembly after its 1st product qualification was done. As for its JV with MIT Semiconductor, Inari continues to strategize critical in-house processes and has started filing patents for some processes.
  • Covid-19 SOPs in place during the CMCO: Addressing concerns over increased Covid-19 cases nationwide amid the conditional movement control order (CMCO), Inari gave an assurance that its production adheres to required SOPs and measures are being taken to ensure business continuity. The group has started repeat testing while continuing its sanitation measures and production as per the Ministry of Health’s instruction.
• 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 - 26 Nov 2020