Long-term investors are finding it hard to navigate their portfolios with the first federal funds rate hike in March and a more aggressive rate hike expectations for this year amid high inflation.
In Malaysia, the stock market is not spared from the uncertainties in global markets.
While it is probably safer to rotate into some of the “value” stocks such as banks, I think that long-term investors should take the opportunity to gradually build positions in select growth stocks in Malaysia.
With this in mind, I think Inari Amertron Berhad (KLSE: 0166) offers a good buying opportunity. The prospects for the semiconductor player remain bright with its radio frequency (RF) business set to benefit from rising demand for 5G smartphones.
It is also an open secret that Inari, which is Malaysia’s largest outsourced semiconductor assembly and test (OSAT) player, is a key component supplier to the most valuable company in the world: Apple Inc (NASDAQ: AAPL).
With all that, here are five reasons why I think investors should buy into this semiconductor player following the sell-off in its share price.
1. Strong earnings growth
Despite the lacklustre share price performance, Inari has maintained its growth momentum.
In the first half of fiscal year 2022 (1H FY2022), Inari recorded 17.5% growth in its revenue to RM 851.4 million (US$201.8 million) as compared to RM 724.5 million in the corresponding period a year ago.
In line with the better top-line performance, the company’s net profit grew by 33.8% to RM 214.2 million during the same period.
The robust growth in its earnings is also reflective of its longer-term growth.
Based on its trailing 12-months revenue and net profit of RM1.56 billion and RM385.5 million, respectively, Inari has recorded a compounded annual growth rate (CAGR) of 24% an 35% for both its revenue and net profit over the last decade.
2. Earnings outlook remains strong
The management has guided that the RF division will sustain its earnings growth in the 2H FY2022, driven orders for its legacy products.
The recent launch of Apple’s iPhone SE with 5G is also another positive catalyst for the company.
As Apple introduce new powerful chips and 5G features into its most affordable iPhone line-ups, this will keep up the momentum for its RF division.
3. Potential growth prospects
Aside from its existing business, the finalisation of Inari’s joint venture (JV) agreement – with China Fortune-Tech Capital Co (CFTC) to establish its OSAT presence in China – is also another growth lever for Inari.
As China’s chip foundries push ahead with capacity expansion plans and increase self-reliance amid the bitter high-tech war with US, this will benefit Inari’s expansion into China over the long term.
4. Robust fundamentals and dividend
Aside from the strong earnings growth, I believe Inari has a strong economic moat as its balance sheet remains solid.
Given its net cash position, the company will also be shielded from the rising interest rate environment.
The successful private placement undertaken by Inari to raise RM 1.03 billion in 2021 also put the company’s expansion plans into motion.
In terms of its cash flow, Inari has continued to generate positive operating cashflow. In the 1H FY2022, the company generated RM 278.0 million in operating cashflow, an increase from the RM 228.4 million in the 1H FY2021.
Management also rewards its shareholders as seen by the average dividend yield of around 3.2% over the last five years.
This is impressive considering its strong earnings growth over the last 10 years.
5. Five key projects with five new customers
Inari’s recent private placement allows the company to diversify away from the reliance on a single customer as part of its next phase of growth.
Among the five key projects are:
1) System on Module assembly and test for automotive industry
2) Transceiver Module for data centres
3) High Power LED package
4) RF double-sided moulding (DSM) system in package
5) Advanced embedded material
The group targets for these new projects’ contribution to start in FY2022 with at least 5% and to grow to 15% in FY2023.
Inari’s strong track record worth the premium
One of the downsides to Inari is perhaps its valuation but I think given its strong track record, it is worth the premium.
On top of that, the company has seen a decline of 22% in its share price year-to-date, which offers a better entry price.
It is also worth noting that the sell-off seems to have dissipated following the rebound from its lows since the middle of last month.
For long-term investors, the prolonged upcycle in the semiconductor sector, Inari’s expansion and its track record warrant the stock as a buy despite the uncertainty in the stock market.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.