Inari’s FY21 core net profit of RM335m (+138% YoY) exceeded our and consensus expectations, driven by higher-than-expected EBITDA margin and lower-than-expected D&A. With the successful private placement exercise, Inari’s war chest is further boosted, allowing it to scout for synergistic and complementary M&A and bring the group to the next level. Reiterate BUY with a higher TP of RM4.28, pegged to 40x CY22 FD EPS. We strongly believe that iPhone 5G super cycle will continue while opto division is expected to improve with more customer diversifications and partnerships.

Exceeded expectations. 4QFY21 core net profit of RM86m (+19% QoQ, +124% YoY) brought FY21 sum to RM335m (+138% YoY) which beat HLIB and consensus full year expectations at 108%. The outperformance was attributable to higher-thanexpected EBITDA margin and lower-than-expected D&A. FY21 one-off items include reversal of inventories to net realisable value (-RM2.7m), forex loss (+RM6.8m), PPE disposal gain (-RM41k) and PPE written off (+RM5k)

Dividend. Proposed fourth interim single tier DPS with 95% payout ratio or 2.5 sen (4QFY20: 1.1 sen), which goes ex on 8 Sep. YTD DPS amounted to 11.0 sen (109% payout ratio) vs FY20’s 4.4 sen (91% payout ratio).

QoQ. Partly aided by stronger USD (4QFY21: RM4.13/USD vs 3QFY21: RM4.06/USD), turnover gained 5% to RM361m thanks to higher loading volume in both optoelectronics and generic segments. In turn, core net profit was lifted by 19% to RM86m attributable to lower effective tax rate of 5.0% (3QFY21: 5.5%) despite higher D&A (+2%).

YoY. While forex was unfavourable (vs 4QFY20: RM4.32/USD), revenue leaped 55% due to higher volume loading of products, primarily RF products. Stripping off noncore items, core earnings expanded 124% thanks to EBITDA improvement (+7.6ppt) on the back of favourable sales mix.

YTD. For the Same Reason as Above, Top and Bottom Lines Increased by 35% and 138%, Respectively.

FY sales breakdown. By product, RF: 60% (FY20: 45%), opto: 33% (45%) and generic: 7% (10%). By segment, smartphone/mobile devices: 63% (55%), optical communication: 13% (17%), automotive: 11% (13%), industrial: 7% (8%) and generic: 6% (7%).

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 (the potential emergence of vaccine resistant variants), Inari continues to be optimistic on FY22 business prospects. It will remain focused on strategies to improve production capacity and utilization to grow revenue consistent with or better than industry forecasts. With the successful private placement exercise, Inari’s war chest is further boosted, allowing it to scout for synergistic and complementary M&A and bring the group to the next level.

Forecast. Based on the deviations mentioned above, we t weaked our FY22-23 estimates upward resulting core PATAMI higher by 7.8% and 8.3%, respectively.

Reiterate BUY with a higher TP of RM4.28 (previously RM3.81), pegged to 40x (from 35x) of CY22 FD EPS, reflecting the upward earnings revision as well as the 10% private placement dilution. We strongly believe that iPhone 5G super cycle will continue while opto division is expected to improve with more customer diversifications and partnerships.

Source: Hong Leong Investment Bank Research - 9 Aug 2021