We recently attended Inari-Amertron’s (Inari) virtual 1HFY22 post-results briefing, hosted by Group CEO KC Lau. The growth momentum for radio frequency (RF) is expected to remain steady in 2HFY22, underpinned by the legacy RF products while it is in the process of prototyping and fine-tuning for new smartphone cycle. Nevertheless, in view of weaker sentiment in the tech sector as a result of rate hike pressures, we revise down our TP from RM5.31 to RM4.72 based on a lower PE of 40x (previously 45x) CY23 EPS. Maintain Outperform call.

• RF remains the key growth driver in the 1HFY22. RF remains the Group’s largest sales contributor for the 1HFY22 at 62% followed by Optoeletronics, 31% and Generic, 7%. Its profit margin of 25.8% in 2QFY22 is also the highest ever for the Group.

• Raw material shortage is the key concern. The logistic shipment issue has resulted in material shortage particularly in China and Philippines. To mitigate the impact, the Group has placed advance orders for certain materials up to 1.5 years and work closely with customers to prioritise materials for key production.

• Allocating RM100m capex for FY22. The Group has invested a total of RM87.5m for the 1HFY22. For FY22, Inari is investing RM100m in capacity expansion, a new technology platform and enhanced processes such as Double Sided Moulding (DSM) packaging system for RF chips, ii) electromagnetic interference, iii) wafer processing and iv) upgrade for for system in package (SiP).

• Finalising JV venture agreement soon. We gather that the Group is finalising the definitive joint-venture (JV) agreement with the private equity fund management company, China Fortune-Tech Capital Co (CFTC) to establish its OSAT presence in China.

• 5 new projects in focus. As part of its next growth phase, the Group is currently working on 5 new projects, namely, i) System On Module (SOM), ii) Transceiver Module, iii) High Power LED package, iv) New RF DSM SiP Package technology and v) Advanced Embedded Material. Production for SOM assembly and test at P55 plant for power module Customer 1 will take place in March 2022 and 2nd customer in 2Q 2022. We believe SOM segment will become a new growth driver for Inari’s automotive segment. Meanwhile, management also shared that it has secured a new customer in the high-power LED segment, where production is expected to commence in 4Q 2022. These new initiatives could potentially contribute an additional 5-8% for FY22 and 15%-20% for FY23 revenue, respectively.

Source: PublicInvest Research - 23 Feb 2022