Investment Highlights

• We maintain our HOLD recommendation on Inari Amertron (Inari) with higher earnings forecasts and increased fair value of RM4.52/share (previously RM3.18/share). Our FV is pegged to a CY23F PE of 37x (previously 28x PE on CY22F). This is at a premium above our benchmark target using 3-year historical forward PE for outsourced semiconductor assembly and test (OSAT) companies. We make no ESG adjustment to reflect our 4-star rating (Exhibit 4).

• Inari’s 1QFY22 results came in within expectations, recording a core profit of RM106.7mil. The results accounted for 29% and 28% of our and consensus’ fullyear 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: 1QFY22 core profit surged 52.8%, driven by: (i) 24.0% increase in revenue on higher growth in its radio frequency (RF) business; (ii) 4ppt higher EBITDA margin of 33%.

• QoQ: 1QFY21 core net profit soared 13.8% in tandem with a 19.3% 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: According to International Data Corporation (IDC), 5G shipment continue to be a primary driver of 2021 growth as 5G devices carry a significantly higher average selling price than older 4G devices. This is anticipated to provide stronger momentum for its RF business. Inari believes the momentum to persist into 2022, on the back of good demand and tight supply for the semiconductor market consistent with industry forecast.

• Positive factors priced in. We like Inari due to its role as a proxy for the growth of 5G through its RF business, which is set to benefit from the expected increase in demand for 5G smartphones going into FY22. 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. However, Inari is already trading at a 28% premium above our benchmark target forward PE for OSAT companies, which is at 29x, thus limited upside.

Source: AmInvest Research - 15 Nov 2021