• Keep BUY and MYR3.59 TP, 40% upside and c.4% FY23F (Jun) yield. 9MFY22 core earnings of MYR302.2m were in line and on track to hit another record year – supported by higher loading and margin expansion amid higher operating leverage and favourable FX. While Inari Amertron may be excluded from the KLCI in May (share price tumbled 36% YTD to below its 5-year mean of 24x FY23F P/E), we stay positive on its prevailing growth catalysts from 5G smartphone proliferation and new China venture.

• Within expectations. 9MFY22 revenue of MYR1,211.7m (+13.5% YoY) and core earnings of MYR302.2m (+26.6% YoY) were within expectations, at 77% and 75.9% of our and Street’s full-year estimates. The sustainable YoY growth was fuelled by higher loading from its smartphone segment on stronger demand and greater number of chips and tests required. Its radio frequency (RF) products remain the major contributor at 61% of revenue while optoelectronic products made up 32%. EBITDA margin expanded by 3.4ppts to 34.6% on economies of scale and favourable FX movement.

• Sequentially weaker due to seasonality. 3QFY22 core earnings came in weaker QoQ at MYR87.3m (-20.1%), mainly due to lower revenue of MYR360.3m (-14.3% QoQ) given the seasonality effect for its RF products and material shortages in the other product segments. YoY, its bottomline continued its growth momentum at 18.1%, supported by margin expansion, higher interest income, and favourable FX – this was despite revenue only growing by 5.1% YoY. A third interim DPS of 2.2 sen was declared (3QFY21: 2.2 sen + 1.8 sen special dividend) and will go ex on 15 Jun, bringing YTD DPS to 7.8 sen.

• Another record year in the making for INRI, with 9MFY22 core earnings already at 93% of FY21 core earnings. We expect the subsequent quarter to sustain the company’s growth given the growing contribution of its RF products, improved contributions from optoelectronic products, and contribution from new customers, as well as favourable FX movement.

• Maintain BUY. The YTD share price weakness of 36% was on the back of the sector’s de-rating on high inflation and rising yield expectations. Besides, the potential drop out from the KLCI also contributed to the negative sentiment overall. Still, we believe its valuation is attractive, having reverted to below its 5-year mean – at only 24x FY23 P/E currently – despite being a well-known OSAT player that is in the supply chain of a world-renowned smartphone brand with growth visibility stemming from: i) Continued proliferation of 5G, ii) its new China venture via a 55% JV with China Fortune- Tech Capital, and iii) growing demand for semiconductor chips in general. Our TP is inclusive of a 2% premium on its ESG score of 3.1.

• Key downside risks: Weaker-than-expected 5G smartphone orders, US- China trade war escalating, and stronger-than-expected MYR vs the USD.

Source: RHB Research - 17 May 2022