Investment Highlights

• We upgrade our call on Inari Amertron (Inari) to BUY from HOLD with higher forecasts and fair value of RM4.78/share (previously RM4.52/share), pegged to an unchanged CY23F PE of 37x. 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 5).

• We raised our FY22, FY23 and FY24 core profit forecast by 3%, 17% and 19% to RM380.9mil, RM456.2mil and RM480.2mil respectively. This is to account for stronger semiconductor market driven by 5G and datacenters boosted by digital transformation, as well as increasing demand for chips on more complex devices and appliances.

• Margin: The group is expected to maintain gross profit margin of more than 30% yearly, on the back of its continuous effort to invest in new product introduction (NPI) by collaborating with its customers, providing more customized solutions. In addition, the group is expected to benefit from economies of scale stemming from higher volume loading in radio frequency business (RF). As the group is an early adopter of industry 4.0 (I4.0) by investing in automation, it has significantly reduced the risk of margins compression from labor shortages.

• Update on product segment: RF remains the group largest top line contributor at 61%, increased from 55% YoY. As the utilization rate approaching 90%, the group’s will be installing additional advanced system-in-package (SiP) lines (existing 22 lines), as well as 8 more electromagnetic interference systems (EMI) to cater for the growing smartphone/mobile devices market, which will be requiring more RF components as newer models are embracing 5G.

• Optoelectronics segment see stronger demand coming from datacenters and industrial divisions, as higher speed fiber products are being rapidly deployed. Material constraints have affected the group’s automotive division. Nonetheless, the group sees potential in the automotive segment and is in the midst of installing new customer pilot line, further diversify its revenue stream.

Source: AmInvest Research - 16 Nov 2021