Investment Highlights

• We maintain BUY call on Inari Amertron (Inari) with a higher fair value (FV) of RM3.53/share (from RM2.80/share), pegged to a rolled forward FY24F PE of 27x - 1 standard deviation above its 5-year median. We continue to ascribe a 4-star ESG rating, which provides a 3% premium to Inari’s FV (Exhibit 8).

• We anticipate a modest improvement in the short term for the radio frequency (RF) sector, which contributed 59% of Inari’s 9MFY23 revenue, due to the launch of new 5G-enabled smartphone models in 2HCY23 with Statista projecting a 5-year compounded annual growth rate (CAGR) of 2.5% to US$54bil by 2028 for the global market (Exhibit 7).

• Nevertheless, revenue growth could be impacted by a slow recovery in smartphone demand amid weaker global consumer sentiments. To recap, a key leading American consumer electronics company has signed a multibillion-dollar contract with Inari’s direct customer earlier this year.

• Looking ahead, we are optimistic about the long-term prospects of this segment. We foresee continuous growth, driven by increasing content requirements for RF filters, particularly with the higher complexity needed for new generations of 5G-and-beyond devices.

• We acknowledge the supply-chain disruptions and US-China trade tensions which caused a slowdown in in data centre services since 2H2022. However, we anticipate a gradual recovery in 3QCY23, underpinned by improving demand for data centres with higher speeds and advanced capabilities that are driven by Artificial Intelligence platforms, digital services, cloud computing, IoT and video streaming.

• Based on Precedence Research, the global optoelectronics market is projected to grow at a 10-year CAGR of 12.5% to US$21bil by 2032 with multinational corporations expanding regional data storage and fuelling growth in high-speed transceivers. Inari is actively involved in producing fibre optic transceivers, which are vital components of optical network equipment in data centres.

• Inari has also started production in memory chip, which utilises cutting edge technology of 4 stacked dies, and has been ramping for its customer. The company would eventually progress to 8 and 16 stacked dies, elevating Inari’s advanced packaging expertise in the future.

• As the automotive segment, which accounts for 11% of 9MFY23 revenue, steadily ramps up, Inari has successfully secured a few significant projects involving high-powered LEDs and power modules within its system-on-module (SOM) division. This project is set to commence in September 2023, marking a promising development for the company.

• In addition, the company has successfully secured a few more new customers, all of whom are involved in a similar product range. This strategic move will pave the way for new production innovations. Anticipating maiden contributions in 2024 and beyond, these new customers undergird stronger growth prospects for Inari.

• The group’s 54.5%-owned YiWu Semiconductor International Corp (YSIC) completed its new plant in July 2023. While the JV’s first production line has been deployed, it is expected to obtain customer audit qualification by Sept 2023. This state-of-the-art facility primarily offers premium OSAT services to valued Chinese local customers. Upon reaching full commercial operation, this venture is expected to accrete 10% to Inari’s FY24F net profit. However, we have not incorporated this into our forecasts pending further clarity on the plant’s progress.

• From valuation perspective, the stock currently trades at an attractive CY24F PE of 27x vs its 5-year peaks of over 35x.

Source: AmInvest Research - 4 Aug 2023