Our recent conference call with management reaffirms our positive stance on Inari. RF orders remain strong with visibility up to 6 months. The group is adding more SiP lines to a total of 22 (vs 8 in FY20), representing 2.75x expansion. We attribute this to the latest US 5G smartphones that were launched last week. Utilisation rate is at 80% and expects to ramp up further to 95%. Meanwhile, the group managed to acquire new customers despite the challenging period. It has started back-end testing of optical transceivers for a HK-based customer and is qualifying for sub-module assembly for a Swiss-based customer. Inari’s growth drivers are: (i) increasing RF filters per handset, (ii) long overdue phone replacement cycle, and (iii) broadening exposure in the data centre space. Reiterate OUTPERFORM with a higher TP of RM3.14.

Adding more RF SiP lines. In our recent conference call with Inari, we learnt that the group have added 10 system-in-package (SiP) assembly lines in its P34 plant and is expected to install another 4 SiP lines by end-2020, bringing total SiP lines to 22. This is a 2.75x increase from the 8 SiP lines in FY20 which is based in P13 plant. The current utilisation rate of 80% is expected to be ramped up further to 95%. We attribute the strong RF loading volume to the latest 5G US smartphones that were launched last week.

Overdue replacement cycle will drive demand for the latest US 5G smartphones, making it a go-to-choice for a future-proof upgrade among consumers. Note that the top three active US smartphones in circulation still consist of 4-5 years old models which are due for replacement. The fact that the latest models support 5G and were launched at the same price point as its predecessor will likely entice consumers to upgrade. Inari’s order visibility for RF remains very strong for the next six months.

New customers in P34 plant. To expand its presence in the growing data centre space, Inari has secured a Hong Kong-based customer who specialises in designing and manufacturing its own proprietary optical transceiver. Inari is currently doing the back-end test and expects to qualify for full-line assembly in January 2021. In addition, the group has been working with a Swiss-based company on sub-module assembly for the impedance matching network equipment. We gather that the end user for this product is Lam Research in Penang.

Venturing into OSAT equipment. In an effort to increase revenue streams, Inari has formed a JV with MIT to collaborate on manufacturing OSAT equipment. For the initial stage, the JV will focus on developing customised equipment for Inari’s consumption. Within a timeframe of 1-2 years, Inari targets to get qualified by potential customer and register for IP protection which will allow the group to sell the equipment externally.

We increase our FY20E and FY21E NP both by 8% each to RM259.7m and RM324.9m, representing growth of 67% and 25%, respectively. With the 2.75x increase in SiP lines, we expect RF contribution to double from FY20.

Maintain OUTPERFORM call with a higher Target Price of RM3.14 (previously RM2.50) based on higher CY21 PER of 35x (previously 30x), representing +2SD above its 3-year mean considering Inari is the purest proxy to the 5G adoption in the US flagship smartphone.

Risks to our call include: (i) less aggressive orders from its key customer, (ii) delay in 5G rollout, and (iii) higher-than-expected input costs.

Source: Kenanga Research - 22 Oct 2020