KUALA LUMPUR (Jan 7): RHB Investment Bank Research today upped its target price for Inari Amertron Bhd to RM3.28 from RM2.87 as the former expects robust demand to continue for the latter into the first half of 2021 (1H21) on the increase in components for the latest range of 5G smartphones and strong sales which prompted a major phone maker to increase production.

It reiterated its "buy" rating on the stock with a higher target price of RM3.28 based on an unchanged 37 times to FY22F target price-earnings (P/E) and dividend yield of about 2%.

In a note today, RHB analyst Lee Meng Horng said with the additional capacity, margin improvement, and the alleviated worries over technological competitiveness, he continues to favour the stock as a proxy to the 5G trend.

Lee said the 5G hype is just getting started.

"This is further boosted by reports that robust smartphone sales prompted the US phone maker to lift production by 10%-20% [year-on-year (y-o-y)] in 1H21. Higher adoption of 5G smartphones is likely to accelerate in the next few years, on the wider availability of 5G networks, following mass deployment. International Data Corp (IDC) estimates the 5G smartphone market in the US alone could see a CAGR of 150.7% (2020-2024F)," he said.

He added that there are more System In Package lines to cater to demand with an increase from eight to 22 lines, due to the strong demand for radio frequency products.

"This was partially reflected (delay in ramp-up) in Inari's 1QFY21 (first quarter of financial year 2021) core earnings of RM77.2 million (+67.8% y-o-y), which exceeded expectations. The higher volume loadings, improved utilisation rate and wider margins in 1QFY21 were due to the increase in content for 5G phones and a lower effective tax rate. We can expect a similar performance in the coming quarters, with upticks in margin — given the higher volume loadings and strong smartphone sales," Lee said.

He made no changes to his forecast two-year earnings CAGR of 43% and target P/E of 37 times, which is at +3SD from the five-year mean.

"While the target P/E is higher compared to other OSATs' (outsourced semiconductor assembly and test) and the overall sector, we believe it is fair — in view of the unswaying market interest in the technology sector, and the company being closely linked to the advent of 5G technology in the smartphone segment," he said.

At the time of writing, Inari Amertron had risen two sen or 0.77% to RM2.62, valuing the company at RM8.65 billion.