Investment Highlights

• We upgrade our call on Inari Amertron (Inari) to BUY from HOLD with higher forecasts and fair value of RM3.31/share pegged to an unchanged CY22F PE of 28x (previously RM3.13/share) after reflecting our 4-star ESG rating, following the recent fall in its share price.
• We raise FY21F–FY23F forecasts by 5–12% to account for better-than-expected margin improvements from its radio frequency (RF) segment due to increased production capacity.
• Inari’s 3QFY21 results exceeded expectations, recording a core profit of RM75mil, bringing 9MFY21 core profit to RM237mil. This is after excluding a RM6mil one-off gain mainly from unrealized forex gains and reversal of inventories to net realizable value. The results accounted for 87% and 81% of ours and consensus’ full-year estimates.

• YoY: 9MFY21 core profit rose by 123% mainly due to: (i) 29% higher revenue on stronger volume loading of its products mainly driven by growth of its RF business; (ii) 4.4 ppts higher EBITDA margin of 31% (vs. 24% in 9MFY20) which we believe is due to better production efficiency supported by the group’s expansion of its RF lines; and (iii) a lower effective tax rate of 7%. This was despite relatively less favourable forex.

• QoQ: 3QFY21 core profit and revenue dropped by 17% and 9% respectively due to lower volume loading for RF products which was marginally offset by higher sales in optoelectronics and generic products and a more favourable exchange rate. 3QFY21 also saw a higher effective tax of 6% (vs. 5% in previous quarter).

• Outlook: Inari expects positive growth in its top and bottom lines for FY21 and FY22, riding on recovery in growth globally, higher semiconductor demand, and the adoption of 5G devices barring worsening Covid-19 developments and restrictive measures as well as worsening of semiconductor shortages. The group plants will continue to ramp up its RF capacity to cater for strong 5G-related demand.

• We continue to like Inari due to its role as a proxy for the growth of 5G through its radio frequency (RF) business which is set to benefit from the expected increase in demand for 5G smartphones. The group’s positive prospects arise from: (i) resiliency in RF earnings due to higher chip complexity in 5G phones; (ii) potential growth in laser devices from more biometrics and augmented reality applications; and (iii) its efforts to enhance and diversify revenue streams.

Source: AmInvest Research - 24 May 2021