We maintain our BUY call on Inari Amertron (Inari) with a slightly higher fair value of RM3.72/share (previously RM3.69/share). Our target price is now pegged to a rolledforward CY23F PE of 25x (previously CY22F PE of 28x).
Our target PE represents a 30% premium above average peer CY23F PE of 19x for outsourced semiconductor assembly and test (OSAT) companies, reflecting the company’s position as a proxy for 5G applications growth through its radio frequency (RF) offerings. We maintain our 4-star ESG rating, which translates to a 3% premium to Inari’s fair value (Exhibit 4).
Our forecasts are unchanged as Inari’s 9MFY22 core profit of RM302mil (+28% YoY) came in within expectations on the back of resilient semiconductor demand. The results accounted for 77% of our FY22F earnings and 76% of consensus.
On a QoQ basis, 3QFY22 revenue fell 14% to RM360mil, which led to core profit contracting 18% to RM88mil. We view the seasonal decline as normal given that the group’s stronger performance during the calendar year-end typically matches the launch cycles of new products.
On a YoY basis however, 3QFY22 revenue grew 5% while core profit surged by 18%. The increase is primarily driven by: (i) a stronger USD; (ii) 5%-point increase in EBITDA margin to 35%; and (iii) 2.4x Surge in Interest Income From Fund Placements.
The group has declared a dividend of 2.2 sen for the quarter under review, translating to a dividend payout ratio of 94%. However, we view that the high payout ratio will not affect the group’s expansion plans given its robust net cash position of RM2bil (21% of market cap) as of March 2022.
The World Semiconductor Trade Statistics (WSTS) has raised global semiconductor sales growth in 2022 from 8.8% to 10%, reaching US$614bil. However, we note that global 5G smartphone sales penetration has surpassed 4G since January 2022. As Inari’s sales are concentrated in the smartphone business (65% in 1HFY22), we are of view that the segment’s growth may start to taper as higher 5G smartphone penetration could mean lower demand for upgrades from 4G.
In addition, Inari derived RM98mil or 8% of its 9MFY22 revenue from China. As local regulators remain firm on the zero-Covid policy, we remain cautious on this headwind and its repercussions. We expect further guidance from management on the lockdown impact and mitigation plan, as well as progress on its segment diversification in an investor briefing later today.
Nonetheless, we remain upbeat on Inari’s fundamentals and outlook. The group’s long-term prospects stem from: (i) the resilience of its RF earnings and margin due to higher chip complexity in 5G devices and its applications; (ii) strong net cash position of RM2bil as at March 2022, which translates to 21% of its market cap; and (iii) its plans to enhance and diversify revenue streams via joint ventures in outsourced semiconductor assembly and test manufacturing in China.
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