Inari’s 1HFY21 core net profit of RM176m (+119% YoY) exceeded our and consensus expectations. The strong performance was mainly thanks to higher than-expected EBITDA margin driven by efficiency gain. Proposed second interim single tier dividend of 2.5 sen per share which goes ex on 17 Mar. Inari will continue to expand capacity to meet the robust RF demand over the next few quarters. Reiterate BUY with higher TP of RM3.88, pegged to 35x CY22 FD EPS. We strongly believe that iPhone 12 super cycle is likely to boost Inari back to its glory days while opto division is expected to improve with more customer diversifications and partnerships.

Exceeded expectations. 2QFY21 core net profit of RM100m (+30% QoQ, +196% YoY) brought 1HFY21 sum to RM176m (+119% YoY) which beat HLIB and consensus expectations at 66% and 67%, respectively. The outperformance was attributable to higher-than-expected EBITDA margin driven by efficiency gain. 1HFY21 one-off adjustments include reversal of inventories to net realisable value (- RM3m) and forex loss (+RM19m).

Dividend. Proposed second interim single tier dividend of 2.5 sen per share (2QFY20: 1.0 sen), which goes ex on 17 Mar. YTD DPS amounted to 4.5 sen vs 1HFY20’s 2.3 sen.

QoQ. Despite the weaker USD (2QFY21: RM4.11/USD vs 1QFY21: RM4.20/USD), turnover gained 8% to RM377m due to higher volume loading in RF products. This is on the back of seasonal strength and continued demand recovery from semiconductor devices despite the prevailing Covid-19 pandemic. In turn, core net profit surged at a stronger pace of 30% to RM100m thanks to favourable sales mix where contribution from higher-margin RF was higher and lower effective tax rate.

YoY. While forex was unfavourable (vs 2QFY20: RM4.16/USD), revenue leaped 42% due to higher volume loading of products, primarily RF products. Stripping off non core items, core earnings tripled attributable to the favourable sales mix and reversal of deferred tax provision.

YTD. For the same reason as above, top and bottom lines increased by 25% and 119%, respectively.

Outlook. Inari saw good demand in RF business in 1HFY21 and expect momentum to continue in subsequent quarters spurred by the launch and growth in 5G smartphones where even more RF components are required to handle NR spectra. Barring any sudden deterioration in the global economy, Inari is optimistic on the earnings for FY21. It will continue to (i) improve production capacity; and (ii) add automation processes to generate higher revenue and operating margins. It is also cognizant of the on-going shortages in certain semiconductor supply chain and have taken steps to secure raw materials ahead.

Forecast. Tweaked our model based on the deviation mentioned above. In turn, FY21-23 EPS are raised by 12%, 15% and 14%, respectively. Reiterate BUY with higher TP of RM3.88 (previously RM3.28), pegged to unchanged 35x of CY22 (previously FY22) FD EPS. We strongly believe that iPhone 12 super cycle is likely to boost Inari back to its glory days while opto division is expected to improve with more customer diversifications and partnerships.

Source: Hong Leong Investment Bank Research - 25 Feb 2021