Investment Highlights

• We maintain our BUY call on Inari Amertron (Inari) and fair value (FV) of RM3.72/share, pegged to an unchanged CY23F PE of 25x. We continue to ascribe a 4-star ESG rating, which translates to a 3% premium to Inari’s FV (Exhibit 4).

• Inari’s 1QFY23 net profit of RM106mil (+19% QoQ, -0.3% YoY) came in within expectations, accounting for 24% of our FY23F earnings and 25% of consensus. The group’s 1QFY23 revenue of RM377mil is also deemed broadly in line, attributing to 23% of our estimate. Therefore, we retain our FY23F–FY25F earnings.

• YoY, the group’s flattish 1QFY23 earnings were mainly attributed to a 13% decline in revenue due to softer loading volume, offset by the lower administrative expenses (-17% YoY) and ringgit weakness.

• On a QoQ basis, 1QFY23 revenue grew 12% as all business segments reported higher sales. This translated into sequentially higher core earnings by 19%.

• Inari’s near-term revenue and earnings growth is expected to be driven by the optical communication segment. This segment’s FY23F revenue is projected to grow by 30% as the group is in the final stage of offering turnkey services to its key customers.

• Moreover, with 2 additional power system-on-module lines in the group’s P34 plant, the automotive segment is gradually ramping up and we view the group’s diversification effort into this segment positively.

• Meanwhile, the smartphone segment is guided to be flattish, in line with expectations of slowing demand. Recall that 63% of the group’s FY22 revenue is attributed to the smartphone segment.

• However, a worse-than-expected slowdown in demand from the mobile device segment due to a global economic slowdown may pose downside risks to our earnings forecast and fair value. The strengthening of MYR against US$ is also unfavourable to the group given that exports account for 93% of 1QFY23 sales.

• Nevertheless, the stock currently trades at an attractive excash FY23F PE of 17x vs its 5-year mean of 30x. The group’s long-term prospects stem from:
  i. the resilience of its radio frequency (RF) earnings and margin due to higher chip complexity in 5G devices and applications;
  ii. the company’s plans to enhance and diversify revenue streams via joint ventures in outsourced semiconductor assembly and test manufacturing operations in China;
  iii. formidable net cash position of RM2bil as at September 2022, which translates to 21% of its market capitalisation.

Source: AmInvest Research - 21 Nov 2022