• 1QFY6/24 results were slightly below expectations due to RF testing ops disruption caused by power outages in Aug 23.

• Inari’s diversification initiatives into new areas may provide some reprieve amid softness in the optoelectronics segment, in our view.

• Reiterate Hold, with an unchanged GGM-based TP of RM2.80. At 29.9x FY24F P/E, we think its growth prospects are adequately priced in.

A Slow Start

1QFY6/24 core net profit fell 14% yoy and came in slightly below expectations, at just 22% of both our and consensus’ FY24F estimates, with the variation coming from RF testing disruption due to power outage incidents in August, as well as sustained weakness in the optoelectronics segment. Notwithstanding the slow start, we expect the subsequent quarters’ core net profits to be stronger as we understand the group has consigned additional testers to meet the RF production target.

Expanding Into the Memory Segment

According to management in an analyst call, Inari-Amertron is taking advantage of the current memory inventory glut and falling memory prices by offering cost-effective backend solutions for memory players to help reduce their operational costs. We understand that Inari has secured orders to provide assembly and packaging services for 4-stack memory die, and this could enable Inari to make further inroads into the memory segment as it aims for qualification to provide back-end solutions for 8- and 16-stack memory die. We also understand that this segment carries a lower margin vs. its core businesses, and hence may suppress ROEs as the business grows.

New Diversification Initiatives

Inari is also broadening its advanced back-end solutions through investments in new technologies and bringing in key people, including the group’s new Chief Tech Officer Ms SH Khor, who has vast experience in advanced packaging. The group is seeking to acquire a few strategic customers in high-growth areas, i.e. electric vehicle charging, power management modules for servers and industrial applications, as well as high -power LED, which could lay the path for Inari to win more silicon carbide (SiC)-related projects as its SiC wafer fab capacity ramps up. We, however, trim our FY24-25F EPS by c.1.5% as we assume higher FY24-25F capex and lower revenue growth from the opto segment, amid extended softness in the automotive and traditional data centre spending.

Reiterate Hold

We maintain Hold on Inari with an unchanged GGM-derived TP of RM2.80. While we believe the company is likely to see stronger RF performance and recognise revenues from its new ventures, the stock is trading at an expensive 29.9x FY24F P/E vs. its 8-year mean of 24.3x. Upside risks include: 1) stronger-than-expected smartphone shipment volume, 2) demand for YSIC’s OSAT services picking up meaningfully, and 3) stronger-than-expected recovery in the optoelectronics. Downside risks: Huawei gaining market share in the premium handset segment affecting iPhone sales, and new ventures failing to ramp up.

Source: CGS-CIMB Research - 24 Nov 2023