• Stay NEUTRAL, TP drops to MYR2.31 from MYR2.60, 2% upside with c.3% FY23F (Jun) yield. 9MFY23 core earnings of MYR255m (-15.7% YoY) missed estimates, due to a more pronounced slowdown in volume loadings and margin compression. We cut our forecasts accordingly to reflect the softer numbers and persistently gloomy outlook. The weak demand outlook, coupled with the potential exclusion from the FBM KLCI, may cap Inari Amertron’s near-term share price. Its current valuation (at mean P/E) is fair.

• Below expectations. 9MFY23 core earnings comprise 67.4% and 66% of our and Street’s full-year estimates, mainly on its lower margin (-2.5ppts) and topline disappointment. Revenue dropped by 12.9% YoY to MYR1.06bn from the slowdown in the semiconductor sector and lacklustre sales of consumer devices. A third interim DPS of 1.4 sen was declared (3QFY22: 2.2 sen) and will go ex on 15 Jun.

• A significant slowdown in 3QFY23 was observed, with revenue down by 23.5% YoY (-31.5% QoQ) to MYR275.8m. This led to a 41% and 49.7% drop YoY and QoQ in core profit to MYR51.7m. Both the radio frequency (RF) and optoelectronic businesses were impacted by softer smartphone demand, lower loading factors, and higher input costs (utility and staff costs). Earnings, meanwhile, were partly cushioned by higher interest income and favourable FX movements.

• Challenging outlook remains. While a seasonally stronger QoQ performance can be expected in 4QFY23, the outlook for the RF and optoelectronics businesses remains subdued on an uncertain outlook and a more pronounced sector slowdown – Gartner expects global semiconductor revenue to shrink by 11.2% YoY this year.

• The announced Apple-Broadcom deal to develop the 5G RF components in the US days ago brings a certain relief to Broadcom’s supply chain and contract manufacturers. Although the details of the deal were not disclosed, this is certainly a positive development and should remove overhang concerns – as the existing contract is set to expire by June.

• Potential exclusion from FBM KLCI. The forthcoming semi-annual review by FTSE Russell, expected to be announced on 1 Jun, may see INRI being removed from the constituents as its market capitalisation ranking of eligible stocks had fallen to 36th place and below on the review date.

• Forecasts and ratings. We cut FY23F-25F earnings by 14.8-10% and roll forward our valuation base year to FY24 (ie 24x P/E), resulting in a lower TP of MYR2.31. Key upside/downside risks are stronger-/weaker-than-expected 5G smartphone orders, new contract wins and favourable/unfavourable FX movements.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 26 May 2023