The shares of Inari Amertron (INARI) continued to rally, closing at RM3.46 on Wednesday, 25.4% higher year-to-date. Macquarie Equities Research (MQ Research) is of the view that the high market liquidity from low interest rates, coupled with a buoyant short term earnings outlook, will drive sector valuations for the next 9 months. In a report dated 26 January, MQ Research upgrades INARI to Outperform, with a target price of RM3.52.

Key Points

• Upgrade target multiple to 34x CY22E price-earning ratio (PER). Raise FY21/22E earnings per share (EPS) by 4%/5%. Upgrade INARI to Outperform with RM3.52 target price (TP) (prev: RM2.80).
• High liquidity and buoyant FY21/22 earnings outlook should be supportive of valuations over the next 9 months; MQ Research expects multiples to expand.
• Bull case: 2-year forward EPS outlook surges to ’18 high of 12.7sen; on the current 31x PER, fair value would be RM3.90 implying +23% upside.

Multiple-driven Upgrade

• INARI’s valuations are expensive, but MQ Research expects it to get even more expensive in the coming months. As articulated in a previous research article, MQ Research anticipates that the combination of high market liquidity from the low interest rates coupled with a buoyant short term (ST) earnings outlook will drive sector valuations for the next 3-4 quarters. The bullish sector outlook is in-line with MQ Research’s tech team’s global outlook. INARI’s assembly and testing of radio frequency (RF) front-end filters for tier-1 smartphones (60% of revenue) ties directly into the thematic of growing smartphone 5G content. MQ Research believes it will underpin a 20% revenue compounded annual growth rate (CAGR) till FY23. MQ Research’s earnings upgrades remain rational (still 2-3% below consensus). Furthermore, with 5G penetration to increase in 2021/2022, MQ Research sees limited downside risk to the crucial 1QFY22 (ended Sept) earnings. MQ Research also notes that INARI’s valuations have historically been very buoyant prior to the 1QFY results (announced in late Nov). Lastly, INARI’s earnings outlook (2yr forward) is still 24% below the peak seen in 2018. MQ Research’s bull case future value (FV) of RM3.90 assumes earnings outlook (whether it is achieved is a different matter) rebounds to the 2018 high, and INARI retains the current multiple of 31x PER (2yr forward).

Word of Caution

• While MQ Research expects the 5G upgrade cycle underpins INARI’s earnings growth at least till FY23, MQ Research expects RF content growth will begin to decelerate beyond that. Furthermore, long term (LT) smartphone growth is expected to fall back to low single digits. While MQ Research forecasts FY20-23E net profit (NP) CAGR of +33%, it is likely to decline unless INARI successfully diversifies into new customers and/or new products. Otherwise, it would be very tough to justify a PER multiple of >30x; especially considering INARI’s relatively high valuations vs its customers. Another risk to valuations would be reduction in market liquidity; particularly on interest rate hikes, though MQ Research does not anticipate any in the ST.

Earnings and Target Price Revision

• MQ Research is raising FY21/22E EPS by 4%/5% and TP to RM3.52 (prev: RM2.80) on 34x CY22E PER.

Price Catalyst

• 12-month price target: RM3.52 based on a PER methodology.
• Catalyst: 4QFY21 results, Broadcom results, 5G newsflow.

Action and Recommendation

• Upgrade INARI to OP, with higher RM3.52 TP from RM2.80 previously.

12-month Target Price Methodology

• INARI MK: RM3.52 based on a PER methodology

Source: Macquarie Research - 29 Jan 2021