INARI Poised to Grow in New China Venture

RHB Research has maintained “BUY” rating on Inari Amertron with new target price (TP) MYR3.54, which translates to 24% upside and c.4% FY23F (Jun) yield. FY22 record core earnings of MYR388m (+19.8% YoY) met expectations – buoyed by higher volume loading, margin expansion amid higher operating leverage and favourable FX.

Despite the moderated growth expectation, the research house stays positive on Inari Amertron’s prevailing growth catalysts from its new China venture in the medium term, strong track record, and being a proxy to the technology sector in the FBM30, on the back of renewed interest lately.

Within expectations. FY22 revenue of MYR1,547.9m (+8.3% YoY) and core earnings of MYR388.4m (+19.8% YoY) came in within expectations, at 98.8% and 98.5% of our and Street’s full-year estimates. The overall YoY growth was fuelled by higher loading for the radio frequency (RF) segment, stemming from stronger smartphone demand and greater number of chips and tests required. EBITDA margin expanded by 3.8ppts to 35.2% on economies of scale and favourable FX movement. A forth interim DPS of 2.2 sen was declared (4QFY21: 2.5 sen) and will go ex on 8 Sep, bringing YTD DPS to 10 sen/share.

Sequentially weaker. 4QFY22 core earnings of MYR85.8m (-2.2% QoQ, +0.4% YoY) were affected by lower revenue of MYR336.2m (-7.0% QoQ, -6.7% YoY) amid lower loading volume in optoelectronics and generic business segments, affected by material shortages. Despite the weaker topline, core profit was rather flattish, mainly cushioned by margin expansion, higher interest income, and favourable FX movement.

Moderated growth in FY23F. It is expected growth to moderate into FY23, coming off from 19.7% and 112.6% YoY growth in FY22 and FY21, on the back of potentially slowing smartphone sales in FY23. Nonetheless, the demand for data centre market remains resilient due to continued cloud infrastructure investment. Overall, growth in FY23 could stem from improved contributions from optoelectronic and generic products, contribution from new customers, as well as favourable FX movement.

Maintain BUY. The research house holds the view that there is an upside from its current mean valuation of 26x FY23F P/E, especially on the backdrop of renewed interest in the technology sector following stabilising inflation and bond yield. Besides, INARI is a well-managed OSAT player that supplies to the world-renowned smartphone brand, with the next growth visibility stemming from: i) Continued proliferation of 5G, ii) its new China JV venture with China Fortune-Tech Capital, and iii) growing demand for semiconductor chips. The forecasts are largely unchanged, except for the minor effect from the model up keeping exercise, resulting in a slightly lower MYR3.54 TP based on 30x FY23F P/E, inclusive of a 2% premium on its ESG score of 3.1

Key downside risks: Weaker-than-expected 5G smartphone orders, advancement of technology, escalating US-China trade war, and unfavourable FX movement.

Salient Points:-

Target Price (Return): MYR3.54 (+24%)
Price (Market Cap): MYR2.86 (USD2,369m)
ESG score: 3.10 (out of 4)
Avg Daily Turnover (MYR/USD) 26.9m/6.08m

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