Inari charted back-to-back all-time high quarterly earnings with 2QFY21 CNP of RM90.1m (+27% QoQ; +140% YoY), inclusive of RM11.7 forex losses. 1HFY21 CNP of RM161m came in above expectations, representing 62%/61% of our/ consensus full-year estimates. We expect strong RF demand to continue, driven by the replacement cycle of older smartphone models. The group’s vacant floor space of 480k sq. ft. in P34 plant may potentially attract new MNC customers which are currently scrambling for capacity amid the chip shortage. Maintain OUTPERFORM and Target Price of RM4.00.

Above expectation. Inari Amertron (Inari) charted back-to-back all-time high quarterly earnings with 2QFY21 CNP of RM90.1m (+27% QoQ; +140% YoY), inclusive of RM11.7m forex losses. 1HFY21 CNP of RM161m came in above expectations, representing 62% and 61% of our and consensus full-year estimates, respectively.

Results’ highlight. QoQ, 2QFY21 CNP jumped 27% to RM90.1m on the back of an 8.4% increase in revenue as the group continues to receive very strong radio frequency (RF) orders from its key customer. YoY, 2QFY21 CNP jumped 140% on a 42% increase in revenue as the adoption of 5G connectivity in the latest US flagship smartphone resulted in heightened demand for RF components. Cumulatively, 1HFY21 CNP soared 88% to RM161m while revenue increased 25% to RM724.5m.

Order flows will remain strong. Moving into 3QFY21, we anticipate the group to continue benefiting from such robust orders as the latest US flagship smartphone is still highly sought after by consumers. Unlike the previous models, this latest one supports 5G connectivity which is one of the main attractions for buyers. Hence, we believe this time around, the demand among consumers will not be limited to the tech enthusiasts who upgrade yearly but also the huge replacement cycle coming from existing users who are still using 4-5 year old models. Inari is currently running at 90% utilisation, defying the typical seasonality

Prime proxy for new customers. The semiconductor shortage we are seeing in the market now is mainly due to increased consumer spending on electronic gadgets. Firms which took a cautious approach on capex last year are now facing capacity constraint. To alleviate the bottleneck, many firms are scrambling for floor space which puts Inari in a sweet spot given it has recently completed its massive expansion in Batu Kawan with 680k sq. ft., of which 480k sq. ft. remain unutilised. This positions Inari perfectly to welcome multinational corporations (MNCs) as potential customers.

We raise our FY21E CNP by 8% to RM280.5m and maintain FY22E CNP at RM324.9m, representing growth of 80% and 16%, respectively.

Maintain OUTPERFORM recommendation and a higher Target Price of RM4.00 based on FY22 PER of 40x (representing +2SD above its 1-year mean), justified by a super technology cycle driven by 5G and prospects from potential new customers/M&A which are not priced-in yet.

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 - 25 Feb 2021