Inari Amertron (Inari) 1HFY22 core earnings rose 33.8% YoY to RM214.2m, led by all three key segments. The results were in line with both our and consensus projections at 55% and 54% respectively. A second DPS of 2.8sen was declared for the quarter, bringing its cumulative DPS to 5.6sen. Following the recent sell-down, we believe it is a good opportunity for investors to accumulate Inari shares as valuations have fallen to about 5-year historical mean. We reiterate our Outperform call with an unchanged TP of RM5.31 based on 45x CY23 EPS. It remains our top pick for OSAT space, premised on the radio frequency’s robust outlook driven by the resilient demand for 5G mobile devices.

• RF segment remained the key growth driver. Inari’s 2QFY22 revenue rose 11.5% YoY to RM420.2m, driven by growth across all business segments. Its radio frequency (RF) segment remained the key growth driver, predominantly driven by higher utilization of its system in package assembly lines for RF. We understand that its RF division’s utilization has been hovering above 90% since Sept 2021. Both the optoelectronics and generic chips also showed improved results.

• A new record quarterly earnings. 2QFY22 core earnings rose 19% YoY to RM107.3m, as gross margin remained steady at 31.6%. The new record quarterly earnings also marked the sixth consecutive YoY growth.

• Strong balance sheet. Following the completion of the private placement last year that raised RM1bn, Inari’s balance sheet has strengthened significantly. Excluding the RM300m outlay for the China’s venture, it still sits comfortably on net cash balance of RM1.6bn (RM0.43/share) With a sizeable war chest, and steady outlook for its RF business, we think it is well-positioned to benefit from the industry upcycle.

• No concerns over wafer shortage. We do not see a material impact on Inari’s loading volume despite global concerns over wafer shortages as its key customer does not rely on external foundries as it produces its own wafers through an internal fab in North America.

• New business venture underway at P34 plant. For P34 floor space utilization, the plan is to have Block A reserved for its German customer and its acquirer, Block B for its US customer (for RF testers and PCL) while Block C is for customer C, who has expertise in RF technology and also new prospects. Meanwhile, management has submitted its Request for Quote for the assembly services jobs related to modules and chips as well as power modules.

Source: PublicInvest Research - 21 Feb 2022