Investment Highlights

• We maintain BUY on Inari Amertron (Inari) with a lower fair value of RM3.62/share (previously RM4.78/share).

• Malaysia’s technology sector has mirrored Nasdaq’s performance, which has slipped 13% since the beginning of the year amidst expectations of rising interest rates. Consequently, Inari CY22F PE dropped from a high of 38x in Nov 2021 to 23x currently. We have reflected the lower earnings multiple in our valuation to better represent 2022 market sentiment.

• Our FV is now pegged to a normalised CY22F PE of 28x (previously 37x PE on CY23F). This is at a 30% premium above our peer CY22F PE for outsourced semiconductor assembly and test (OSAT) companies, reflecting the company’s position as a proxy for the growth of 5G through its radio frequency (RF) business. We maintain our 4-star ESG rating, which is reflected in a 3% premium to Inari’s fair value (Exhibit 4).

• Inari’s 1HFY22 results came in within expectations, at RM214mil core profit on the back of resilient semiconductor demand. The results accounted for 56% and 54% of our and consensus’ full-year estimates. We consider the results in line as 1H results for the past 3 years have been seasonally stronger due to the launch cycle of end-customers’ products.

• 1HFY22 core profit surged 33% YoY, driven by: (i) a 15% revenue growth from Singapore; (ii) 2%-point increase in EBITDA margin to 33%; and (iii) 3.9x surge in interest income from fund placement.

• Sequentially, the group’s 2QFY22 revenue decreased 2.5% to RM420mil due to lower loading volume from its optoelectronics segment. However, the group was still able to increase its core profit marginally by 1% to RM108mil from a 2%-point contraction in the effective tax rate to 7%.

• Nonetheless, we remain upbeat on Inari’s fundamentals and outlook as it is set to benefit from the expected stronger demand for 5G devices in 2022. The group’s prospects stem from:
  (i) the resilience of its RF earnings due to higher chip complexity in 5G phones;
  (ii) strong net cash position of RM2bil as at Dec 2021, which translates to 17% of its market cap; and
  (iii) its plans to enhance and diversify revenue streams via joint ventures in outsourced semiconductor assembly and test manufacturing in China.

Source: AmInvest Research - 21 Feb 2022