INARI’s FY23 results met expectations. Its FY23 core net profit slipped 17% YoY on lower loading volumes across segments. It is likely to benefit from the upcoming US smartphone launch given the model’s increased frequency bands, resulting in higher RF filter requirement. We keep our earnings forecasts but raise our TP by 30% to RM3.20 (from RM2.45). Maintain MARKET PERFORM.

Within expectations. INARI’s FY23 core net profit of RM320.5m (- 17.3% YoY) met both our forecast and the consensus estimate.

Results’ highlights. YoY, INARI's FY23 revenue saw a modest 12.5% decrease, largely influenced by a broader slowdown affecting all business segments. The radio frequency (RF) sector, making up around 59% of the group's revenue, notably suffered with a 14% decline in revenue. This drop is linked to a weakened smartphone market and an ongoing phase of inventory adjustment. Furthermore, both the optoelectronics and generic segments also faced declines of 17% and 20%, respectively. As a result, the core net profit declined by 17.3%, with a slight dip in net margin to 23.7% (compared to 25% in FY22).

Moving into its annual ramp-up period. With the upcoming launch of the new US smartphone drawing near, INARI is expected to benefit from the production ramp-up of the radio frequency (RF) filters. The group guided that the latest version of the US smartphone will be incorporating additional frequency bands that translate into increased demand for RF filters. Additionally, INARI is seeing positive progress from its new business ventures such as the power module packages, memory chips, optical transceivers and the construction of its new factory in China. Most of these products are in the advanced stage of qualification and sampling which will subsequently contribute positively in FY24 and FY25.

Forecasts. Maintained. We also introduce our FY25F net profit forecast (+14% YoY).

We raise our TP by 30% to RM3.20 (from RM2.46) based on a higher 30x (from 23x) FY24F, to reflect the upward trend in its peers’ forward mean. Our TP imputes a 5% premium to reflect its 4-star ESG rating as appraised by us (see Page 4).

Investment thesis. We like INARI as: (i) it is the closest proxy to 5G adoption, (ii) it is highly responsive to the market demand with the roll-out of new technologies such as double-sided moulding (DSM) and system-onmodule (SOM), and (iii) it is expanding aggressively in China, capitalising on the superpower’s aggressive push for semiconductor self-sufficiency. However, we remain cautious due to the waning consumer demand in the smartphone market while its JV venture may not start contributing soon enough. Maintain MARKET PERFORM.

Risks to our call include: (i) worse-than-expected response to its new offerings by its key customer, (ii) worsening supply-chain disruptions, and (iii) expansion in China coming on stream slower than expected.

Source: Kenanga Research - 30 Aug 2023