Investment Highlights

• We maintain 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).

• We retain our earnings estimates as Inari’s 2QFY23 results came in within expectation. The group’s 1HFY23 core net profit of RM209mil (-3% YoY) formed 48% of our full-year FY23F earnings and 52% of consensus. The group’s 1HFY23 revenue of RM780mil is also deemed broadly in line, attributing 46% of our estimate.

• YoY, the group’s lower 1HFY23 earnings were mainly attributed to an 8% decline in revenue due to softer loading volume, which was partially offset by lower administrative expenses (-12% YoY).

• On a QoQ basis, 2QFY23 revenue grew 7%, predominantly driven by its radio frequency segment given the introduction of a newer model that commands higher value as well as pickup in demand for end-products due to the holiday season. The jump in sales translated into a sequential 10% increase in core earnings.

• Inari’s near-term revenue and earnings growth are 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 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 positively view the group’s diversification effort into this segment. 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 recession 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 95% of 1HFY23 sales.

• Nevertheless, the stock currently trades at an attractive FY23F PE of 18x vs its 5-year mean of 28x. The group’s longterm 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;and
  iii. formidable net cash position of RM2bil as at December 2022, which translates to 21% of its market capitalisation.

Source: AmInvest Research - 27 Feb 2023