Inari posted a strong 6MFY21 net profit of RM160.2m, a strong growth rate of 88% YoY. The results came in above both our and consensus estimates, representing 58% and 61% of the forecasts respectively. The discrepancy in our projections was mainly due to lower-than-expected cost of sales. We also highlight that Inari has broken its seasonal trend of delivering the strongest earnings in 1Qs, by reporting a record high profit of RM90m in 2QFY21. We think that this strong momentum could potentially extend into 3QFY21, as the orders for RF segment remains strong. We lift our earnings forecast for FY21- 23F by 7-8% to account for the improved operational efficiency arising from strong volume loading. Our TP is also adjusted upwards to RM4.40, based on a PE multiple of 45x. Maintain Outperform. Inari has also announced a dividend of 2.5sen per share.

• New record. Inari’s quarterly revenue climbed to a new high of RM376.8m in 2QFY21, surged by 42% YoY. The strong growth in revenue was predominantly due to better contribution from its radio frequency (RF) division. We highlight that Inari had a total of 22 SiP lines installed by end December, which was a 2.75x increase YoY, from the initial 8 operational SiP lines in 2QFY20. Net profit also leaped as a result, by 140% YoY to RM90.1m. We opine that the strong volume loading, supported by the increase in RF content in 5G technology, has led to better margins, with PAT margins hitting 24%, as opposed to 14% in 2QFY20. Not to mention that the utilization rate for its RF segment has also been well above 90% in 4QFY21.

• Outlook. We reckon that the addition of 14 new SiP lines implies strong demand from its largest customer in the RF space and we also highlight that its capacity for 3QFY21 has been booked out. We opine that the RF segment’s utilization rate should still maintain above 90% in 3QFY21, given the order visibility. The full revenue potential of all 22 SiP lines will also only fully be reflected in the coming quarter, as some of the new SiP lines were commissioned progressively in 2QFY21. We raise our earnings forecast for FY21-23F by 7-8% to account for better operational efficiency given the strong volume loading.

• 5G rollout bodes well for Inari. 5G devices will have denser RF contents as it supports a larger range of frequency bands. Denser RF content would also translate into longer test times, which raises the assembly and testing costs, ultimately benefitting OSAT players like Inari. Inari’s involvement in the US phone maker’s supply chain, via Broadcom, has allowed Inari to ride on this new wave of growth that is led by the 5G evolution.

Source: PublicInvest Research - 25 Feb 2021