• BUY, lower MYR3.59 TP from MYR4.63, 19% upside, c.3% FY23F (Jun) yield. Following the first federal funds rate (FFR) hike, and the upward revision of our in-house FFR forecasts, we bake in the aggressive rate hike expectation and high bond yields into our valuation parameters by lowering the target P/E to 31x from 40x. However, we believe it is a compelling BUY into the only technology stock in the FBM30 – at its current valuation of 25x – supported by its earnings visibility on 5G play and improvements in the optoelectronic segment.

• The start of a rate hike cycle. With the US Federal Reserve’s hawkish tone alluding to another six rate hikes after last week’s 25 basis-point hike, the dust has settled, and the market is seemingly pricing in the aggressive expectations. Nonetheless, with the aggressive rate hike expectations baked in by the market, fewer rate hikes (than the expectation baked in number) would be a positive for the market, should the high inflation scenario be contained. Our in-house economist is rulling out a stagflation event risk, and expects the current UST10YR and MGS10YR yields to peak at around 2.0-2.2% and 3.65-3.75%, which are still relatively lower than the 2018-2019 level.

• Lowering our target P/E valuation. Following the first FFR hike and upward revision of our in-house FFR forecasts to 1.75-2.0% (from 1%) by end 2022, and 2.25-2.50% (from 1.5%) for end 2023, we take the opportunity to build in the new expectations and cut our CY22F target P/E for Inari to 31x (+1SD from the 5-year mean) from 40x (+3SD from the 5- year mean). Our TP is cut to MYR3.59 after applying a 2% ESG premium, based on our proprietary ESG methodology and Inari’s ESG score of 3.10.

• Maintain BUY. The YTD share price weakness of 24% was on the back of the sector’s derating on high inflation and the rising yield expectations. Nonetheless, with the FFR realised, and aggressive policy tightening being priced in, we believe it is an opportunity for investors to accumulate the only technology stock in the FBM KLCI at only 25x FY23 P/E, given its growth visibility which stems from: i) The mid-term structural growth of the 5G story; ii) growing demand for semiconductor chips; and a iii) rock-solid balance sheet.

• Key downside risks to our call include weaker-than-expected orders for 5G smartphones, escalation of the US-China trade war, and a stronger- than-expected MYR vs the USD.

Source: RHB Research - 21 Mar 2022