Investment Highlights

• We maintain BUY call on Inari Amertron (Inari) with an unchanged fair value (FV) of RM3.53/share, based on CY24F of PE of 27x – 1 std dev above its 5-year median. We continue to ascribe a 4-star ESG rating, which translates to a 3% premium to Inari’s FV (Exhibit 4).

• We maintain our earnings forecast after the analyst’s briefing yesterday.

• We anticipate a modest 2QFY24 improvement for the smartphone/mobile devices segment which contributed a substantive 64% of Inari’s 1QFY24 revenue compared to 63% in 1QFY23. This is supported by the new launch of 5Genabled smartphone model in September 2023.

• Inari has solved its power disruption issue that caused lower production yield with a utilisation rate of 75%-80% in 1QFY24. Management guided that the utilisation rate has ramped up to 90% currently with better production yield, which could contribute to an improved 2QFY24 revenue in tandem with a stronger seasonal trend.

• We believe that datacom, automotive and generic segments will support revenue growth for 2HFY24 while radio frequency (RF) division normalise before the next new flagship smartphone launches in 2HCY24.

• Automotive segment’s share to 1QFY24 group revenue declined 2%-point YoY to 10%. However, management expects higher volume loadings, particularly from the optocoupler business, by 2HFY24. Management also guided that some products are undergoing qualification and testing stage while some are in mass production. Despite lacklustre automotive sentiments currently, we expect better contributions from this segment in subsequent quarters on the back of sustained demand for EV charging products.

• The datacom segment saw a marginal 1%-point increase to 13% YoY in share to group revenue in 1QFY24. Management remains positive on the segment growth on emerging AI platforms which are needed by data centres.

• Management mentioned the commencement of a production line for optical transceiver in Philippine, which is already included in our FY24F sales assumption. Moreover, Inari is speeding up the expansion of its Philippine plant, CK2, which is targeted for completion by 3QCY24 to cater for higher demand.

• Generic segment’s share to 1QFY24 group revenue remains flattish YoY at 6%. However, management guided for better loading volume in memory chips in subsequent quarters on higher production yields, which could support better margins. Management is on track with its expansion plan to increase by 3 lines to 4 lines for this segment given clients’ robust volume projections. Management expects this product to generate revenue of RM100mil-RM150mil in this financial year, which is already included in our FY24F sales assumption.

• From a valuation perspective, the stock currently trades at an attractive CY24F PE of 25.6x vs its 3-year peak of over 30x.

Source: AmInvest Research - 24 Nov 2023