Inari’s 9MFY21 core net profit of RM248m (+143% YoY) exceeded our and consensus expectations. The strong performance was mainly thanks to higher than-expected EBITDA margin and lower-than-expected D&A. Proposed third interim single tier and a special DPS of 2.2 sen and 1.8 sen, which both go ex on 8 Jun. Inari will continue to expand capacity to meet the robust RF demand and prepared for new opportunities ahead. Reiterate BUY but with lower TP of RM3.81, 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. 3QFY21 core net profit of RM73m (-27% QoQ, +233% YoY) brought 9MFY21 sum to RM248m (+143% YoY) which beat HLIB and consensus expectations at 83% and 85%, respectively. The outperformance was attributable to higher-than-expected EBITDA margin and lower-than-expected D&A. 9MFY21 one-off adjustments include reversal of inventories to net realisable value (-RM2.3m), forex loss (+RM9m) and others.

Dividend. Proposed third interim single tier and a special DPS of 2.2 sen and 1.8 sen, respectively (3QFY20: 1.0 sen), which goes ex on 8 Jun. YTD DPS amounted to 8.5 sen vs 9MFY20’s 3.3 sen.

QoQ. Besides weaker USD (3QFY21: RM4.06/USD vs 2QFY21: RM4.11/USD), turnover eased 9% to RM343m due to lower volume loading in RF products, albeit this was partially cushioned by higher contributions from both optoelectronics and generic segments. In turn, core net profit fell by 27% to RM73m attributable to less favourable sales mix where contribution from higher-margin RF was lower and higher effective tax rate.

YoY. While forex was unfavourable (vs 3QFY20: RM4.17/USD), revenue leaped 41% due to higher volume loading of products, primarily RF products. Stripping off non-core items, core earnings more than doubled 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 29% and 143%, respectively.

Outlook. The recovery in global growth, the sustained strong global semiconductor demand coupled with 5G adoption are all positive catalysts for Inari. Barring further unfavourable pandemic developments (more restrictive containment measures) and worsening of part shortages, Inari expects positive growths in its top and bottom lines for FY21 and continuing into FY22. Looking ahead, the group will explore means to continue ramping up capacity for the strong 5G demand and to be well positioned for new growth opportunities ahead.

Private placement. Announced earlier to issue 333m new shares (circa 10% of total outstanding shares) to raise circa RM1bn. The listing application for the placement shares was submitted to Burs on 11 May.

Forecast. Based on the deviations mentioned above, we tweaked our FY21 estimate upward resulting core PATAMI higher by 3%, while FY22-23’s are unchanged. Reiterate BUY but with lower TP of RM3.81 (previously RM3.88) after factoring ESOS dilution. Our TP is pegged to unchanged 35x of 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.

Source: Hong Leong Investment Bank Research - 24 May 2021