Investment Highlights

• We maintain BUY call on Inari Amertron (Inari) with a higher fair value (FV) of RM3.86/ share (from RM3.53/share previously), based on a rolled-forward FY25F of PE of 31x (from 27x) – at parity to its 5-year median on the back of improving sector sentiments. We continue to ascribe a 4- star ESG rating, which translates to a 3% premium to Inari’s FV .

• However, we cut our FY24F earnings by 17% to reflect softer-than-expected consumer sentiments in 2HFY24 and lower profit margin assumption of 23% from 25%, impacted by production yield loss due to electricity supply disruptions.

• Key takeaways from an analyst briefing yesterday are:
  
  ➢ To recap, 2QFY24 profit margin dropped to 23.6% (- 0.4%-point QoQ from 1QFY24, -8.6%-point YoY from 2QFY23), due to
  
  (i) RM3mil expenses for machinery upgrades for new products,
  
  (ii) production yield loss of RM1.7mil, and
  
  (iii)power disruptions in Penang.
  
  ➢ Inari’s radio frequency (RF) segment continues to remain steady, accounting for 64% of 2QFY24 revenue vs. 63% in 1QFY24. We expect its RF segment to remain stable at more than 60% of total revenue as Inari is preparing new RF filters for the next generation device models.
  
  ➢ Inari's datacom revenue share saw a notable rise from 12% to 14% in 1HFY24, driven by growing demand for optic transceivers fueled by the surge in AI and server requirements of data centres.
  
  With successful audits from Customer G, Inari aims to scale up small volume production of 800G transceivers in 1QCY24 and is currently running a high-volume manufacturing capacity for 400G transceivers. Meanwhile, Inari also expects its CK2.1 plant in Philippines, scheduled for completion by 3QCY24, to secure firm orders from customers.
  
  ➢ By industrial segment breakdown, Inari’s automotive revenue share dropped slightly by 1%-point to 10% in 1HFY24 vs. 11% in 1HFY23. It was adversely affected by the slowdown of automotive sentiments globally. However, we expect the stronger growth in datacom segment to offset softer revenue contribution from the automotive division.
  
  ➢ The company guided that 4 production lines for memory chips are likely to be ready by Jun 2024, and will kick start with low production volumes. Management expects this product to generate FY24F revenue of RM100mil- RM150mil, which is already included in our sales assumption.
  
  ➢ The group’s 54.5%-owned YiWu Semiconductor International Corp (YSIC) has recently completed machine and equipment installations. This plant is expected to generate FY24F sales of RMB30mil, a marginal 1% of the group’s revenue. We believe that it will gradually ramp up when the production yield and margins are stable, as cost of production is costly in China. The group plans to commence production in phases with phase 1 for chip- scale packaging (CSP) products having passed customer qualification and management is in discussions on a quotation with the customer.

• Over the longer term, we foresee stronger overall revenue growth for Inari, driven by increasing content requirements for RF filters, particularly with higher complexity needed for new generations of 5G-and-beyond devices. From a valuation perspective, the stock currently trades at an attractive CY24F PE of 30x vs. its 3-year peak of over 40x.

Source: AmInvest Research - 28 Feb 2024