• Excluding forex losses, Inari’s 2QFY21 core profit breached the RM100m/quarter mark for the first time
• EBITDA margin surprised on the upside, hitting 34.7% in 2QFY21. 1HFY21 EBITDA margin of 33% was well ahead of our previous forecast of 27%
• Remains a high conviction 5G pick as adoption of the technology should catalyse earnings. Maintain BUY with TP raised to RM5.92

2Q21 Headline Net Profit of RM90m Another Record High

Inari’s 2QFY21 core profit grew 32% qoq on the back of 8% revenue growth. This was underpinned by the additional SiP lines that progressively came on stream during the quarter. As at end-2QFY21 Inari had 22 SiP lines operating compared to 16 lines in the previous quarter. However, as the newer lines only came on stream towards the latter part of the quarter, we should see more a meaningful contribution in subsequent quarters as utilisation has remained robust. This was largely driven by its RF business with the build-up in activity in anticipation of strong demand for its ultimate customer’s new range of smartphone models.

Profit Margins Surprised to the Upside

Excluding forex losses, 1HFY21 core net profit of RM179m was well above expectations, accounting for 66% and 68% of our and consensus estimates for FY21, respectively. The surprise to us was in the strong surge in 2QFY21 EBITDA margin which rose a further 3.3ppts qoq to a high of 34.7%. This was lifted by the better revenue mix where the RF segment accounted for 70% of revenue (55% in 1QFY21). The 1HFY21 EBITDA margin of 33% was thus above our previous forecast of 27%; we believe we had also underforecasted the profitability of its expansion in the assembly business coupled with improved operating leverage. We raise our FY21-23E EPS by 2-21% to account for better profit margins.

Maintain BUY With Higher 12-month TP of RM5.92

We maintain our BUY rating for Inari’s solid growth prospects underpinned by the secular 5G cycle. We project a 3-year forward net profit CAGR of 49% driven by capacity expansion and proliferation of 5G technology. Based on a target PEG of 1 and an unchanged multiple of 49x on the FY22E EPS, our target price is raised to RM5.92. Key downside risks to our call include its key customer losing market share, shortage of production floor workers and skilled engineers, and a sharp rise in the RM vs the US$.

Source: Affin Hwang Research - 25 Feb 2021