Inari’s 2QFY22 CNP of RM108.1 (+2.4% QoQ; +14.8% YoY) hits a new record quarterly earnings, bringing 1HFY22 CNP to RM213.6m which came in within expectations, representing 54% each of both our and street’s full-year estimates. 2QFY22 revenue dipped 2.5% on lower loading from the optoelectronics segment but was supported by higher NPM margins thanks to strong demand for its RF business. We continue to like Inari as a prime proxy to 5G play, and its new ventures into optical transceivers and automotive power modules. Maintain OUTPERFORM with an adjusted Target Price of RM4.60.

Within expectation. Inari registered 2QFY22 CNP of RM108.1m (+2.4% QoQ; +14.8% YoY), recording a new high in terms of quarterly earnings. This brings 1HFY22 CNP to RM213.6m which came in within expectations, representing 54% each of both our and street’s full-year estimates.

Results’ highlight. QoQ, Inari logged yet another new record quarterly earnings in 2QFY22 with CNP of RM108.1m (+2.4%) despite registering a slightly lower revenue by 2.5% to RM420.3m due to lower loading volume from the optoelectronics business segment which is likely attributable to the on-going chip shortage impacting the automotive sector. Thankfully, having good oversight with regards to resource allocation and cost control helped the group maintain a strong margin as 2QFY22 saw another 1.2ppt increase in NPM to 25.7%. YoY, 2QFY22 CNP grew 14.8% on an 11.5% increase in revenue. Cumulatively, 1HFY22 registered a 17.5% growth in revenue to RM851.4m while CNP grew at a larger quantum of 29.6% to RM213.6m.

Upgrades and switching to US smartphone hitting new highs. The strong performance by Inari can be attributed to the elevated demand for the US smartphone that was launched in September 2021. Based on the earnings transcript of the US smartphone manufacturer, the demand came from both existing users upgrading their smartphone as well as new users switching over from another mobile operating system.

Much to look forward to. Looking to expand beyond its dominance in the radio frequency (RF) space, Inari is currently engaged in new ventures and products such as automotive power modules (system-on-module) and optical transceivers for data centres. In addition, Inari has started the process of qualifying customers via its JV with China Fortune-Tech Capital (a VC firm incorporated by SMIC) to offer OSAT-related services in China.

We maintain our FY22E and FY23E CNP forecasts, representing growth of 11% and 12%, respectively.

Maintain OUTPERFORM with an adjusted Target Price of RM4.60 (previously RM4.80) to reflect the enlarged share base on ESOS conversion in late-Jan 2022. Our valuation is based on CY22E PER of 40x (+2SD to its 3-year mean), justified by a super up-cycle driven by 5G.

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

Source: Kenanga Research - 21 Feb 2022