Following Inari Amertron’s (INARI) strong quarter result recorded recently, Macquarie Equities Research (MQ Research) has a positive view on the group with its CY21 earnings outlook remains bullish. MQ Research maintains Outperform on INARI while raising the target price by 8.0% to RM3.80, which is 18.0% above from last Friday’s closing price of RM3.22.

High-certainty CY21E earnings outlook to prop up short-term valuations

• INARI CY21 earnings outlook remains bullish, driven by 1) rebounding smartphone volumes from 2020’s COVID-depressed levels, 2) increased market share of a major smartphone end-customer, 3) rising 5G penetration, 4) modest radio frequency (RF)-content growth, and 5) supply chain inventory build. 1H FY21 delivered RF revenue growth of 66% year-on-year (YoY), and MQ Research forecasts +67% YoY RF revenue growth for FY21. Despite reported production trim, Apple is still guiding +11.6% YoY volumes. MQ Research expects elevated 3Q FY21 loadings due to a late 2020 product cycle. Management is also guiding for earlier ramp-up for the 2021 product cycle to avoid bottlenecks; MQ Research estimates loadings +25% YoY for 4Q FY21. As well, Opto segment revenue looks set for a +30% YoY rebound for 2H FY21. MQ Research believes CY21 earnings outlook remains high certainty and quality and sets a solid floor under INARI’s valuations. However, MQ Research also believes the volume-driven outlook is largely reflected in consensus expectations.

But R&D crystallisation to revenue would be a paradigm shift

• INARI has been investing into research & development (R&D) for electromagnetic interference (EMI) sealing equipment, which is critical to reduce noise “cross-talk” in miniaturised 5G RF front end (FE) components. MQ Research estimates EMI sealing will add 7-10% to total back-end value-add. If successfully qualified by customers, MQ Research estimates INARI may be able to capture >80% share of the EMI sealing process (vs ~35% share for RF assembly). INARI has also been developing an alternative solution to copper pillar bumping that would allow it to undertake wafer bumping. Combined, MQ Research estimates fully scaled-up deployment of said technology could add roughly +10–20% incremental revenue to the RF segment long term and, more importantly, help to justify the high valuations seen by the stock of INARI, which is perceived as a higher-IP company. Management is guiding to RM20m/RM25m R&D spend for FY20/FY21. MQ Research’s bull-case fair value is RM4.70, factoring in 15% revenue upside and R&D add-back.

Earnings and Target Price Revision

• MQ Research is raising FY21E/FY22E adjusted NP 17%/13% to reflect stronger volume loadings for the RF and Opto segments. MQ Research is also raising its target price to RM3.80 (from RM3.52) on unchanged 34x CY22E price-to-earnings ratio (PER).

Price Catalyst

• 12-month price target: RM3.80 based on a PER methodology.

• Catalyst: 3Q FY21 results, qualification of EMI equipment.

Action and Recommendation

• Maintain Outperform. INRI remains a high-quality OSAT in the semiconductor space with sustainable earnings – which fits into MQ Research’s long tech portfolio.

12-month Target Price Methodology

• INARI MK: RM3.80 based on a PER ratio methodology

Source: Macquarie Research - 15 Mar 2021