Inari’s record-breaking 1QFY21 core net profit of RM104m (+20% YoY) matched our and consensus expectations, The outstanding performance was driven by higher RF volume loading coupled with higher finance income . Barring any resurgence of new Covid-19 variants, the group remains positive on near term prospect on the back of higher 5G smartphone shipment along with higher ASP. Reiterate BUY with a higher TP of RM4.48, pegged to 40x FY23 EPS. We strongly believe that iPhone 5G super cycle will continue while opto division is expected to improve with more customer diversifications and partnerships.

Matched expectations. All-time high 1QFY22 sales of RM431m (+19% QoQ, +24% YoY) was translated into a record-breaking core net profit of RM104m (+20% QoQ, +36% YoY) which came in line, accounting for 28% and 27% of our and consensus full year forecasts, respectively. 1QFY22 one-off items include forex gain (-RM4.3m), write down of inventories to net realisable value (+RM1.0m) and PPE disposal loss (+RM14k).

Dividend. Proposed first interim single tier DPS with 94% payout ratio or 2.8 sen (1QFY21: 2.0 sen), which goes ex on 9 Dec.

QoQ. Partly aided by the stronger greenback (1QFY22: RM4.19/USD vs 4QFY21: RM4.13/USD), turnover gained 19% to RM431m thanks to higher loading volume in RF business segment. In turn, core net profit was lifted by 20% to RM104m attributable to higher finance income (+100%) despite higher effective tax rate of 9.6% (4QFY21: 5.0%).

YoY. While forex was unfavourable (vs 1QFY21: RM4.20/USD), revenue leaped 24% thanks to higher contributions from all business segments with RF business segment continued to be the key driver. Stripping off non-core items, core earnings expanded 36% thanks to EBITDA improvement (+3.4ppt) on the back of favourable sales mix as well as higher finance income (+238%).

1Q22 sales breakdown. By product, RF: 61% (1QFY21/4QFY21: 55%/53%), opto: 32% (38%/39%) and generic: 7% (7%/8%). By segment, smartphone/mobile devices: 65% (FY21: 63%), datacom: 12% (13%), automotive: 11% (11%), industrial: 7% (7%) and generic: 5% (6%).

Outlook. The projected growth in global economy and strong forecast in worldwide semiconductor sales are all positive catalysts for Inari. Furthermore, IDC estimates that global smartphone shipment is expected to expand 7.4% in 2021, reaching 1.37bn units, followed by 3.4% gain in 2022 and 2023, respectively. 5G shipments continue to be a primary driver of 2021 growth as both vendors and channels focus on 5G devices that carry a significantly higher ASP than older 4G devices. Barring any resurgence of new Covid-19 variants, the group remains positive on its near term prospects and believes the momentum heading into 2022 will continue to be strong from good demand and tight supply for the semiconductor market consistent with industry forecasts. Its war chest is further boosted post private placement, allowing it to scout for synergistic and complementary M&A and bring the group to the next level.

Forecast. Unchanged. Reiterate BUY with a higher TP of RM4.48 (previously RM4.28), pegged to 40x of FY23 EPS (previously CY22 EPS) as we roll forward our valuation horizon. 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 - 15 Nov 2021