KEY INVESTMENT HIGHLIGHTS

• 1QFY21 normalised earnings improved by +67.7%yoy to RM77.2m, backed by strong volume loadings

• The group’s 1QFY21 financial performance surpassed ours and consensus expectations

• Higher 1QFY21 dividend payout of 2.0sen (vs 1QFY20: 1.3sen) in-tandem with the strong results achieved

• Strategic 5G positioning and active effort to diversify revenue base to sustain earnings growth

• Upgrade to BUY with a revised TP of RM2.96

Surge in volume loadings. Inari Amertron Bhd’s (Inari) 1QFY21 normalised earnings expanded by +67.7%yoy to RM77.2m. This was mainly supported by higher revenue of RM347.6m (+9.8%yoy) as volume loadings improved greatly, especially from the RF segment. Coupled with cost control and lower effective tax rate, the profit margin has also improved to 22.2% (+7.7ppts). All in, Inari’s 1QFY21 financial performance came in better than ours and consensus expectations, accounting for 38.2% and 32.7% of full year FY21 earnings estimates respectively.

Dividend. In tandem with the stronger 1QFY21 earnings performance, the group announced higher 1QFY21 dividend of 2.0sen as compared to 1.3sen announced in 1QFY20.

Impact to earnings. We are revising FY21-23 earnings estimates higher to between RM297.7m to RM391.5m. We input higher revenue contribution primarily from the RF segment given the positive traction on 5G. In addition, we also expect the opto division to performs better due to the group’s effort to diversify its customer base.

Target Price. Post our earnings adjustment, we derive a new target price of RM2.96 (previously RM2.05). This is premised on revised FY22 EPS of 10.7sen against unchanged forward PER of 27.7x. Our target PER is the group’s +2SD above the two years historical average of 20.7x.

Upgrade to BUY. The group experienced a double digit decline in FY20 earnings in line with our expectation. Moving forward, as the impact of Covid-19 dissipates, we view that the group’s volume loadings would improve greatly. This would primarily come from the RF segment as Inari is a close proxy to 5G. Meanwhile, the group is also actively diversifying its revenue base in order to sustain its income growth trajectory. The latter can be seen in the recent joint venture effort with MIT Semiconductor Pte Ltd to supply customised semiconductor process tools. Operationally, we also expect the profit margin to improve continuously arising from various measures to control costs and capex. All factors considered, we are upgrading our call recommendation to BUY from Neutral previously.

Source: MIDF Research - 25 Nov 2020