Investment Highlights

• We maintain BUY call on Inari Amertron (Inari) with an unchanged fair value (FV) of RM3.53/share, based on unchanged 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 5).

• We anticipate a modest 2HCY23 improvement for the radio frequency (RF) sector, which contributed 62% of Inari’s FY23 revenue, with the launch of new 5G-enabled smartphone models in September 2023. Inari also expect to ramp up its utilisation rate above 85% in 1QFY24 and 2QFY24 (vs. 65% in 4QFY23). We foresee continuous growth in this segment, driven by increasing leading edge content and technological complexity needed by a new generation of 5G-andbeyond smartphone devices.

• Datacom’s contribution to the group has improved 2%-point YoY to 15% in FY23 due to emerging requirements for AI platforms which are needed by data centres for higher speed and advanced capabilities. Hence, we expect this segment to be supported by continued demand growth for fibre optical transceivers, which is a key component of optical network equipment in data centres.

• Inari is currently working on new product, silicon photonics packaging for data centres. Silicon photonics allows higher levels of integration and miniaturisation, which can lead to lower power consumption and cost. Well-suited for high-speed data transmission, it supports data rates of up to 400 Gigabits (Gbps). We have not included any earnings contribution in our forecasts pending further clarity.

• Inari guided that the automotive segment, which experienced a marginal 1%-point decline in contribution to 10% of FY23 total revenue, is expected to have higher volume loading by 4QCY23. Inari has successfully secured a few projects involving high-power LED, system-on-module (SoM) for high power server/industrial application. Additionally, Inari is at a discussion stage with customers for new projects involving silicon carbide (SiC).

• Inari has also started production in memory chip, which utilises cutting edge technology of 4 stacked dies, and has been ramping up for its customer. The company would eventually progress to 8 and 16 stacked dies, elevating Inari’s advanced packaging expertise in the future. Management expects this product to generate RM100mil in FY24, which is already included our FY24F sales assumption.

• In addition, Inari is in the midst of discussions with 4 strategic customers involved in automotive, smartwatch, optical transceivers for data centres and automated optical inspection (AOI) machine. Anticipating maiden contributions in 2024F and beyond, these new customers undergird stronger growth prospects for Inari. However, our forecasts have not incorporated this development, which is still in the early stage.

• Inari Is Currently Expending Its Operations as Follows:
  
  (i) Block D, a 15-storey building with 7 production and 8 car park levels encompassing an estimated total 600k square feet, is expected to be completed by February 2024. Including this block, plant P34 in Batu Kawan has a total floor space of 1.3mil square feet. P34 is currently ongoing with assembly and testing processes for products such as system-in-package (SiP) and memory.
  
  (ii) acquired 5 acres of land near P34, which will have an estimated floor space of 220k square feet which allocated for new customers and expected to build in February 2024, and
  
  (iii) Currently at the planning stage for CK3, a 3-storey building in Philippine, for existing customer expansion. Given Inari’s strong cash flows and net cash balance of RM1.8bil as at 30 June 2023, we expect the capex to be internally funded.

• 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 (outsourced semiconductor assembly and test) services to valued Chinese local customers. Upon reaching full commercial operation, this venture is expected to accrete a substantive 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 a valuation perspective, the stock currently trades at an attractive CY24F PE of 27x vs its 5-year peaks of over 35x.

Source: AmInvest Research - 1 Sept 2023