Investment Highlights

• We maintain BUY recommendation on Inari Amertron (Inari) with unchanged fair value (FV) of RM4.36/share, based on FY25F PE of 34x – 2.5 SD above its 5-year mean of 24x. We made no adjustments to our 4-star ESG rating, which translates to a 3% premium to Inari’s FV.

• FY24 earnings of RM306mil were below expectations, coming in 9% under our forecast and 10% of consensus. The negative deviation stems from lower-than-expected margins. That said, we maintain FY25F/FY26F earnings on expectation of improving orders and introduce FY27F earnings with a growth of 7.4% with a slightly lower pretax margin of 27%.

• YoY, FY24 earnings fell by 4.5% despite 9.2% growth in revenue. Inari saw better loading volume in radio frequency (RF) and optoelectronics segment. However, operating cost was higher due to rising electricity cost and unfavourable product mix amid loading of lower-margin new venture products that are still in gestation currently.

• Comparing against 4QFY23, the current quarter exhibited the same trend with higher operating cost offsetting improved revenue. As such, 4QFY24 core net profit decreased 9.4% YoY. On a sequential basis, revenue slid 4.2% QoQ while core net profit fell 17.5% QoQ due to lower loading volume in RF and optoelectronics business as well as unfavourable product mix.

• Declared DPS of 1.4 sen, bringing FY24 DPS to 7.7 sen (FY23: 8.2 sen), yielding 2.3%. We believe management is conserving cash for new ventures (multi-stack die memory, high powered LEDs, Edge AI, SOM or China new venture YSIC JV) to drive long-term growth.

• Over the longer term, we foresee stronger overall revenue growth for Inari, driven by:
  
  (i) Higher content requirements of RF filters for new generation smartphones,
  
  (ii) Higher demand for optical transceivers used in data centres, and
  
  (iii) Ongoing new product innovations in tandem with new technological advancements.

• From a valuation perspective, the stock is currently trading at a compelling 25.7x FY25F PE, which is at a premium to its 5-year peak of over 50x.

Source: AmInvest Research - 28 Aug 2024