Investment Highlights

• We downgrade our BUY recommendation on Inari Amertron (Inari) to HOLD, with unchanged forecasts and fair value of RM2.78/share, pegged to a CY22F PE of 28x.

• Our target PE is in line with our benchmark target forward PE for outsourced semiconductor assembly and test (OSAT) companies with a 20% premium above 3-year historical forward PE of 23x. This is due to brightened prospects riding on innovations such as 5G, 3D sensors, and electric vehicles, which progress has been accelerated by Covid-19.

• Inari’s 2QFY21 results came in within expectations, recording a core profit of RM92mil, bringing 1HFY21 core profit to RM162mil after excluding a RM2mil one-off loss mainly from unrealized forex losses being offset by reversal of inventories to net realizable value. The results accounted for 63% and 62% of our and consensus’ full-year estimates respectively, which we consider in line as 1H results for the past 3 years have been seasonally stronger at ~60% of FY contribution due to the product launch cycle of its end customer’s products.
   
• YoY: 1HFY21 core profit slightly more than doubled due to: (i) 25% higher revenue on higher volume loading of its products mainly driven by growth of its radio frequency (RF) business; (ii) 4 ppts higher EBITDA margin of 31% (vs. 24% in 1HFY20) which we believe is due to better production efficiency supported by the group’s expansion of its RF lines; and (iii) a lower effective tax rate of 7%.
   
• QoQ: 2QFY21 core profit and revenue went up 31% and 8% respectively driven by higher volume loading of RF products and lower tax rate of 4%.

• Outlook: Inari anticipates the strong momentum of its RF business to continue for the subsequent quarters in FY21F driven by positive demand of 5G smartphones which require additional RF components compared to 4G phones. This is supported by its RF expansion to 22 lines in FY21 driven by the strong demand aforementioned. The group has also taken steps to manage its raw material supplies ahead of ongoing shortages in certain sectors of the semiconductor market.

• We continue to like Inari due to its role as a proxy for the growth of 5G through its RF business. However, we deem the stock to be fairly valued. The group’s positive prospects arise due to: (i) the resilience of its RF earnings due to higher chip complexity in 5G phones; (ii) potential growth in laser devices from more biometric and AR applications; and (iii) its efforts to enhance and diversify revenue streams.

Source: AmInvest Research - 25 Feb 2021