Post 4QFY23 briefing, we upgraded Inari to Buy with a higher TP of RM3.50 (previously RM3.15) based on a PE multiple of 30.0x CY24F EPS after revising FY24F/FY25F/FY26F earnings estimates by +2.7%/ +6.1%/+7.2% to factor in the improved optimism on the group’s core radio frequency (RF) segment and progress with new projects. Key briefing takeaways include: i) guidance for RF segment utilisation to ramp up >85% over 1HFY24, ii) guidance for other segments: optical communications & automotive to pick up, and industrial & generic to be stable, iii) successfully received qualification for new projects including memory products and optical transceivers, and iv) China joint venture is expected to be operational soon with commencement of first line and customer audit expected by 3QCY23.

Ongoing Cost Optimisation Upheld Above Industry Average Profitability

Coming off a record performance in FY22, Inari closed FY23 with lower revenue and core net profit of RM1,354.0mn (-12.5% YoY) and RM320.5mn (- 17.3% YoY). The weak performance mirrored the semiconductor industry’s cyclical downcycle as the group observed broad-based weakness across all segments, including radio frequency (RF) (-14.0% YoY), optoelectronics (-9.8% YoY), and generic (-12.5% YoY). Notably, while Inari faced margin compression on the back of lower utilisation and cost pressures (e.g., electricity tariff hike in Malaysia), management highlighted that ongoing cost optimisation and Industry 4.0 initiatives allowed the group to uphold its above-industry average profitability with core net profit margin at 23.7% (-1.4pp YoY).

RF Segment to Ramp Up

Into FY24, management is cautiously optimistic, especially on Inari’s core RF segment (59% of FY23 revenue). Driven by a new flagship program, the RF segment’s utilisation rate was guided to ramp up from ~60% in 4QFY23 to >85% over 1HFY24. Despite weak global smartphone unit sales, note that the higher loadings would be commensurate with the higher and growing RF content demanded within 5G smartphones as well as the ongoing migration to 5G smartphones. As for the other segments, management’s guidance includes: i) optical communication gradually picking up from emerging artificial intelligence platforms, ii) automotive loadings expected to increase by 2QFY24, and iii) both industrial and generic demand to be stable.

Successful Qualification of Projects

On revenue diversification efforts, management highlighted that Inari has successfully received qualifications for new projects. Of note, they comprise: i) memory products (involving complex 4-stack thin die bonding), and ii) optical transceivers (involving silicon photonics technology for data centres), with their use within data centres expected to grow alongside emerging artificial intelligence platforms. Potential revenue from new customers was guided from RM100mn to RM150mn. Apart from these, management had also indicated that the group is in talks with several strategic customers with prospects relating to electric vehicle charging, smartwatches, data centres, and automated optical inspection equipment.

China JV Making Progress

In China, Yiwu Semiconductor International Corporation (YSIC) has been progressing with its new Yiwu, Zhejiang plant. Recall that YSIC is a joint venture between Inari (54.5%) and China Fortune-Tech Capital Co Ltd (45.5%). The JV is intended to carry out outsourced semiconductor assembly and test manufacturing and related business exclusively for the Chinese market. Management shared that the facility is expected to be operational soon, with the commencement of the first line and customer audit expected by 3QCY23. Furthermore, YSIC's aspirations to pursue a listing within 5 years are also intact.

Impact

We have revised our FY24F/FY25F/FY26F earnings estimates by +2.7%/+6.1%/+7.2% upon raising sales by +1.7%/+3.8%/+4.6% to factor in the improved optimism on the RF segment and progress with new projects. Post earnings revision, we forecast earnings growth at +22.5%/+20.2%/+7.9%.

Valuation & Recommendation

Corresponding to the earnings upgrade, we have raised Inari's TP higher to RM3.50 (previously RM3.15) based on a PE multiple of 30.0x CY24F EPS, which is closely at parity with the stock's 5-year mean. We deem this as fair given Inari's growth prospects catalysed by the 5G theme, traction with customer diversification efforts, above-industry average profitability, expansion plans, and robust balance sheet. Given the stock's improved risk-reward potential, we upgraded the stock to Buy.

Key downside risks include geopolitical tensions weighing on economic growth and disrupting supply chains, strengthening of the Ringgit against the USD, surge in commodity prices, and material shortages.

Source: TA Research - 1 Sept 2023