On 2 December 2021, we saw INARI’s share price plunged 5.6% after the news that iPhone 13 line-up has weakened due to the global supply crunch. According to the report, the company had earlier cut production of iPhone13 by as many as 10 mil units due to a global chip shortage, but now it has informed vendors that those orders may not materialize.
Is this dip an opportunity? Let’s talk about it.
INARI’s recent Quarterly Result Updates
INARI is mainly engaged in outsourcing semiconductor assembly and testing services (OSAT) and electronic manufacturing services (EMS).
INARI’s revenue grew 19.3% to RM431.123 million in the current quarter as compared to RM361.3 million in the immediately preceding quarter. The growth was mainly contributed by higher loading volume in the Radio Frequency business segment and this will be a major contributor to the turnover growth.
The group has also recorded a profit after tax of RM106.9 million for the current quarter, an increase of 20.5% from RM88.7 million recorded in the immediate preceding quarter. The higher profit after tax was derived from the increases in revenue growth.INARI is a net cash company and the group’s trade receivables (RM229.527mil) are enough to offset the trade payables (RM224.828mil).
The net cash from operating activities provided a positive cash flow of RM66.447 million in 2022Q1 as compared to RM88.194 million in last year indicating that the company is healthy and has enough cash to use for its business expansion.
The net cash used in investing activities in 2022Q1 (RM833,000) was mainly due to the purchase of property, plant and equipment (RM21.278mil). However, as compared with last year, the company has reduced its expansion.
The net cash from financing activities in 2022Q1 (RM895.635mil) was mainly due to the net proceeds from the issuance of shares (RM1.031bil).
Future Outlook
According to the International Monetary Fund, the global economy is expected to grow by 5.9% in 2021 and 4.9% in 2022.
The World Semiconductor Trade Statistics (WSTS) released its latest semiconductor forecast in August 2021. WSTS expects the global semiconductor market growth will increase from 6.8% in 2020 to 25.1% in 2021, which is equivalents to a market size of USD551 billion.
According to the International Data Corporation (IDC), the shipments of smartphones are expected to grow 7.4% in 2021, reaching 1.37 billion units, followed by 3.4% growth in 2022 and 2023 respectively. 5G shipments continue to be primary driver of 2021 growth as both vendors and channels focus on 5G devices that carry a significantly higher average selling price than the older 4G devices.
The group is strengthening its optoelectronic segment. Using the group’s existing facilities in Amertron Technology (Kunshan), the new JV will be able to accelerate the qualification process for new customers before moving into a new plant when the need arises. While INARI has yet to provide further information on its potential customers and products involved in the new JV, we opine that it is likely related to the optoelectronic segment, mainly in the automotive space, in line with the expertise in its Kunshan plant. Amertron Technology (Kunshan) has a land area of 50k sq. ft. and contributes c.10% to the group’s revenue.
In addition, INARI is seeking merger and acquisition. The merger and acquisition will allow the group to master the upstream wafer packaging and downstream integrated system module business.
Based on the private placement from financing activity of up to RM1.03 billion, the group is in a strong cash position. This cash can be used for M&A activities to expand, or for other capital needs to strengthen the company services. Therefore, the company wants to double up its revenue and production capacity in 2022 to 2023.
Another recent JV development is that INARI and China SMIC Juyuan (a VC firm incorporated by SMIC) plan to set up an associated company in China in order to engage in semiconductor test outsourcing services (OSAT). Once the cooperation between these two parties is confirmed, it will help the group to generate an additional 18% of net profit in 2023.
When the plan goes into fruition, it will give a big boost to INARI’s bottom line. Thus, INARI has a good potential to get into the FBMKLCI which could mark as the first ever Tech stock to achieve this milestone.
In general, the company’s prospect remains bright, as you can imagine that the semiconductor will be a major trend in the future. We believe the momentum heading into 2022 will continue to be strong from good demand and tight supply for the semiconductor market consistent with the industry forecast.
Risk
The recent tech sell down is also linked with the recent revelation by human rights activist – Andy Hall who revealed the bad labour practices in the big tech companies. On this issue, UOB Kay Hian Research House remarked that INARI has been working very closely with its IDM customer and end-customer all these years on ESG issue, and maintaining upmost practices aligning to the ESG related guidelines. In addition, according to the UOB report, INARI has met the globally recognized standards and has been qualified for inclusion into the FTSE4Good Bursa Malaysia Index since 22 June 2020. For FY2020, INARI generated 574 tonnes of waste and 90.06% of the waste was recycled, reused and recovered. We believe the company should maintain a fairly good ESG practices at work.
Secondly, one of the market concerns is that the prosperity tax will have an impact on the earnings of large companies in our country in the next coming year. We opine that the impact to INARI will be minimal. As the technology stock with the highest market cap in the Malaysian stock market, INARI’s pre-tax profit in the last fiscal year reached RM352 million, which far exceeded the net profit threshold of at least RM100 million for the prosperity tax. However, about 65% of INARI’s pre-tax profit are derived from local businesses, and 50% of them will receive tax exemptions. Therefore, the impact of the prosperity tax should not be significant.
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