Macquarie Equities Research (MQ Research) raises its target price for Inari Amertron (INRI) to RM4.35 (from RM4.15) and raises its net profit estimates for the company on the back of INRI’s China expansion; the development of a plant in China under INRI’s joint venture with China Fortune-Tech Capital Co Ltd will give INRI an opportunity to diversify into higher value-add niches like wafer level chip scale packaging (WLCSP).

Conclusion: Another 12 Months of Cover

• Downside risk seems limited to MQ Research. MQ Research anticipates INRI’s lofty valuations will not be tested until the next peak earnings cycle in 1QFY23 (reporting in late-Nov 2022). Historically, INRI’s valuations have only corrected when results miss expectations during peak earnings quarters (1HFY, ended-Dec). MQ Research thinks there is low risk this occurs in 1H22 as supply chain shortages have sustained elevated loading. Management is guiding that ~90% capacity utilisation will persist through 2QFY22 (ended-Dec), and they have 6-month order visibility from customers.

Another Million Square Feet

• In addition, INRI is finally deploying its surplus capital to drive revenue growth in FY23/24. INRI’s 55% joint venture (JV) with China Fortune-Tech Capital Co Ltd will see the development of a 1million sqft plant in China on an 11-acre piece of land. Management expects the move will enable INRI to access new China-based customers and potentially move into high value-add niches like wafer level chip scale packaging (WLCSP). The plant is guided to being under construction my Jan 2022, and be completed in 8-9 months. Some of the initial product loadings include high powered LEDs (applications include automotive) at high volume. From management’s presentation, MQ Research infers the potential customers have a high degree of urgency. MQ Research has assumed 35%/65% capacity utilisation for the plant for FY23/24.
• Separately, management has indicated that it is still on the lookout for another M&A opportunity. Following the aforementioned JV, MQ Research estimates INRI has ~RM1.4bn net cash available for another deal. Based on management’s historically conservative track-record, MQ Research would not expect INRI to rush for a deal nor overpay for one.

Earnings and Target Price Revision

• MQ Research raises FY23/24 revenue by +8%/+13% to account for the aforementioned JV, raise FY23/24 adjusted net profit (NP) by +6%/6% respectively. MQ Research increases its target price (TP) to RM4.35 (from RM4.15) on 35x CY22E price-earnings ratio (PER) (previously 34x), which is +2StdDev above the 3-year average.

Price Catalyst

• 12-month price target: RM4.35 based on a PER methodology.
• Catalyst: 1QFY22 results (end-Nov), M&A deal, conclusion of JV (by Dec).

Action and Recommendation

• Increase TP to RM4.35. Maintain Outperform.

12-month Target Price Methodology

• INRI MK: RM4.35 based on a PER methodology

Source: Macquarie Research - 28 Oct 2021