Inari Amertron Berhad (Inari) 3Q23’s core profit plunged by 50% QoQ and 42% YoY to RM57.4mn due to lower volume loadings across all business segments amid softening in global demand for consumer electronics. Overall, 9M23’s core profit of RM257.2mn (- 16% YoY) trailed our and consensus estimates, accounting for 55% and 66% of full year forecast respectively. Given Inari’s significant exposure in smartphone products which represents 60%-65% of revenue, it outlook is expected to remain challenging due to softer demand for smartphone products worldwide. We slashed our FY23F - FY25F earnings forecast between 32% - 39% as we revised down our revenue across all business segments. Downgrade our call to a HOLD from a BUY with a new lower TP of RM2.25 (from RM3.75). Our valuation implies a 26x PER (0.5-SD below mean of 5-year average historical forward PER) pegged to FY24F of 8.6 sen.

• Below expectations. Inari’s 9M23 core profit of RM257.2mn fell short of our and consensus’ expectations, accounting for 55% and 66% of full year forecast.

• Dividend. A third interim DPS of 1.4 sen was declared (3QFY22: 2.4 sen) which implies a payout ratio of 91% and brings a YTD DPS of 6.2 sen (9MFY22: 7.8 sen).

• QoQ. Core profit plunged by 50% QoQ primarily due to lower volume loadings in RF and Optoelectronics business segment.

• YoY/ YTD. Core profit plummeted by 42% YoY due to lower volume loadings across all business segments amid softer demand for consumer electronics. As a results, EBITDA margin contracted by 10.3ppt to 24.5% from 34.8%.

• Outlook. We foresee a challenging outlook for Inari given its huge business exposure within the smartphone products (represents 60% - 65% of revenue) which may pose downside risk to earnings amid softer demand for smartphone products globally. According to Gartner, worldwide smartphone shipments are expected to decline by 4% in 2023 to 1.23 bn units from 1.28 bn units in 2022.

• Forecast. We slashed our FY23F/FY24F/FY25F earnings forecast by 32%/38%/39% as we revised down our revenue across all business segments.

• Our call. Downgrade our call to a HOLD call (from a BUY) with a new lower TP of RM2.25 (from RM3.75) in line with our earnings revision. Our valuation is based on 26x PER (0.5-SD below mean of 5-year average historical forward average PER) pegged to FY24F of 8.6 sen.

Source: BIMB Securities Research - 26 May 2023