Our recent conference call with management reaffirms our positive conviction on Inari. Current RF orders from key customer remain robust, pointing to a similar momentum going into 2QFY21 and 3QFY21, bucking the typical seasonal trend. We attribute this to the latest US 5G smartphone that enjoyed a 2.5x increase in pre-orders compared to its predecessor, with some models still experiencing shortages. Current utilisation rate is at 90% which is expected to stretch further to 95% with addition of five more SiP lines in its P34 plant to a total of 22 lines by end-2020. Reiterate OUTPERFORM with an unchanged TP of RM3.14.

RF demand remains elevated. We came away from a recent conference call with Inari learning that the group is still experiencing robust orders from its key customer owing to the strong consumer demand for the latest 5G US smartphone which was launched in October. As guided by the management previously, contribution from the radio frequency (RF) segment has indeed increased significantly. As of 1QFY21, RF contributed 55% to group revenue (vs. 49% in 1QFY20). Assuming a continuation of the strong momentum, RF contribution could potentially peak at 60-65%.

22 SiP lines by end-2020. For 1QFY21, the group’s RF division was running on all 17 system-in-package (SiP) assembly lines (8 existing lines in P13 plant and 9 new lines in P34 plant). The group recently installed the 18th and 19th line in end-Sep and is in the midst of adding 3 more lines by end2020, bringing the total SiP lines to 22. The current utilisation rate is at 90% and is expected to stretch further to 95%. We attribute the strong RF loading volume to the latest 5G US smartphone with pre-orders 2.5x higher compared to its predecessor, with some “pro” models still experiencing shortages.

New ventures progressing well. Updates on the HK-based customer which 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. Besides that, the JV with PCL has started its first shipment in June and is expected to break even in 2QFY21.

Improving conditions for optoelectronics segment. Inari is seeing some improvement for its automotive and industrial products but is still receiving spot orders due to market conditions. Operations in Kunshan, China has resumed to full operation while Philippines have recovered from 25% to 60% in May 2020.

We maintain our FY21E and FY22E NP of RM259.7m and RM324.9m, respectively and OUTPERFORM call with unchanged Target Price of RM3.14, based on higher CY21 PER of 35x, at +2SD to 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 - 26 Nov 2020