Inari will remain in the KLCI index as FTSE Russell has yesterday announced that there will be no changes to the KLCI index constituent for the June 2022 review. This comes as a positive surprise given that the market was expecting its deletion, which explains the selling pressure over the past few months. With FTSE confirming its KLCI status, we believe the sentiment overhang has been lifted, and see a good reason for the earlier weakness to be reversed. Maintain OUTPERFORM and Target Price of RM3.30.

Sentiment hurdle passed. Inari will remain in the KLCI index as FTSE Russell has yesterday announced that there will be no changes to the KLCI index constituent for the June 2022 review. While Hap Seng Consolidated met the market cap requirement (risen to 25th position or above) to be included based on the closing date (25th May 2022), it failed the liquidity test whereby if a non-constituent does not turn over at least 0.05% of their shares in issue (after the application of any investability weightings) based on their median daily trading volume per month for at least ten of the twelve months prior to the semi-annual review, it will not be eligible for inclusion in the index.

This comes as a positive surprise given that the broad market was expecting its deletion, which explains the selling pressure over the past few months. With FTSE Russell confirming its KLCI status, we believe the sentiment overhang has been lifted, and see a good reason for the earlier weakness to be reversed.

US smartphone production to remain stable. Moving into 4QFY22, we are expecting the group to achieve a slight QoQ growth which is in line with the group’s expectation of a satisfactory quarter to close FY22. In addition, it has been reported that the US smartphone manufacturer is likely to keep the upcoming smartphone production volume stable YoY despite increasing supply chain challenges from China’s sporadic lockdown. We see this as a positive sign given that market intelligence firms like IDC are expecting a 3.5% overall decline in the global smartphone market for 2022. In the latest 1QCY22 shipment numbers reported by IDC, global smartphone shipment fell 8.9% YoY except for the US smartphone being the only one to record growth of 2.2% YoY.

New business wins. Understanding the need to diversify its revenue away from smartphones (65% of group revenue), Inari has secured two new customers (relating to power module and automotive) under its system on module (SOM) segment and is in talks with a potential third customer. The group also received a new project for high powered LED (commencing end- 2022) as the customer relocates from China. In addition, Inari has received RFQ in April from a US customer relating to memory chip products and will start sample builds by June 2022, followed by the job award in Aug 2022.

We maintain our forecast for FY22E and FY23E CNP. Maintain OUTPERFORM with an unchanged Target Price of RM3.30 at 28x FY23E PER, representing +0.5SD to its 5-year mean.

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 - 3 Jun 2022