Macquarie Equities Research (MQ Research) wrote a report on Inari Amertron (INRI), noting that INRI has demonstrated high operational resilience through the MCO3.0 lockdowns, allowing it to deliver a 5.4% quarter-on-quarter increase in revenue for the fourth quarter ended June 2021. MQ Research raised its estimated net profit for INRI and its target price to RM4.15. INRI shares closed at RM3.56 (+0.3%) yesterday, 6.9% higher month-to-date. Bullish investors who are keen to gain a leveraged exposure to INRI at a fraction of its share price may consider call warrants INARI-C84 and INARI-C87.

Weathered the Worst

• INRI has demonstrated high operational resilience through the MCO3.0 lockdowns, which has curtailed headcount to 60% since May. Flexibility in manpower allocation, front-loading of volumes, and disciplined segregation of workforce has allowed INRI to deliver a +5.4% quarter-on-quarter (q/q) increase in revenue (RM361m) in 4QFY21 (June-end). Looking ahead, rising vaccination rates (INRI workforce 90% vaccinated), and easing movement restrictions (in Penang), should reduce further risk to production. In-fact, management indicated that capacity utilisation could have been higher in 4QFY21 if not for the lockdowns and raw-material limitations.

Increased Revenue Certainty, for Now

• Looking ahead, MQ Research sees less risk from order cancellations. On the radio frequency (RF) front (60% of revenue), INRI will be heading into seasonal peak production that is going to precede a strong smartphone product cycle for Apple. Concerns on broader supply chain disruption will force customers to prioritise high-capacity utilisation over minimising inventories.
• Meanwhile, INRI management has indicated that the raw-material shortages that held back the Opto segment for most of FY21 has begun to ease. Starting almost one year back, INRI has moved to aggressively lock in raw-material supply; and the benefits should be seen through FY22E. More importantly, INRI has managed to secure a back-to-back guarantee by customers for take-or-pay agreements. This means that the potential loadings for the segment are highly secured.
• Chief upside to MQ Research’s assumptions are: 1) confirming new customers (est. +10% net profit (NP) upside (e.g. power management chips), 2) diversification into system-on-module assembly/testing (est. 10% NP upside), and 3) mergers and acquisitions (M&A) of new business, boosting earnings base; INRI has ~RM1.9bn in cash.

Earnings and Target Price Revision

• MQ Research raises FY22/23E adjusted NP by +8%/13% on better revenue forecasts and margins. MQ Research raises its target price (TP) 9% to RM4.15 on unchanged target multiple of 34x CY22 price-earnings ratio (PER), +2.5sd vs 2-yr forward, T3-yr average).

Price Catalyst

• 12-month price target: RM4.15 based on a PER methodology.
• Catalyst: 1QFY22 results, ramp-up of new customer.

Action and Recommendation

• Raise TP to RM4.15. Maintain Outperform; as per 2H21 outlook (see excerpt here), stay overweight tech.

12-month Target Price Methodology

• INRI MK: RM4.15 based on a PER methodology

Source: Macquarie Research - 13 Aug 2021