1HFY23 core earnings of RM202m (-4% YoY) was deemed to be in line as 2H is seasonally weaker. Given the depressed outlook, Inari remains cautious on its recurring RF and opto businesses. It continues to work on new opportunities coming onshore into Malaysia’s OSAT ecosystem at the same time bringing up new China JV site in Yiwu to commence manufacturing operations in 2HFY24. Reiterate HOLD with unchanged TP of RM2.48, pegged to 25x FY23 EPS. Although we strongly believe that iPhone 5G super cycle will continue while opto division is expected to improve with more customer diversifications and partnerships, its risk and reward profile is balanced at current juncture.

Within expectations. 2QFY23 revenue of RM403m (+7% QoQ, -4% YoY) translated into an all-time high core net profit of RM118m (+41% QoQ, +10% YoY) which brought 1HFY23’s to RM202m (-4% YoY), accounting for 55% and 51% of our and consensus full year forecasts, respectively. We deem this to be in line as 2H is seasonally weaker. 1HFY23 one-off items include forex loss (+RM3.4m), reversal for slow moving inventories (-RM1m), PPE disposal loss (+RM40k) and PPE written off (+RM1k).

Dividend. Proposed second interim single tier DPS with 88% payout ratio or 2.2 sen (2QFY22: 2.8 sen), which goes ex on 15 Mar. YTD DPS amounted to 4.8 sen vs 1HFY22’s 5.6 sen.

QoQ. Partly aided by the stronger greenback (2QFY23: RM4.56/USD vs 1QFY23: RM4.49/USD), turnover gained 7% to RM403m attributable to higher contribution from RF business segment. Core net profit grew at a faster rate of 41% mainly due to lower corporate effective tax rate (2QFY23: 7% vs 1QFY23: 12%).

YoY. Despite the favourable forex (vs 2QFY22: RM4.18/USD), revenue slipped 4% due to lower loading volume in optoelectronics business segment. However, bottom line gained by 10% thanks to higher net interest income (+107%) and lower corporate effective tax rate (2QFY22: 8%).

YTD. Sales fell 8% to RM780m mainly due to lower volume loading. However, core net profit declined at a slower pace of 4% to RM202m cushioned by higher net finance income by 100%.

2QFY23 sales breakdown. By product, RF: 63% (2QFY22: 62%), optoelectronics: 29% (30%) and generic: 8% (8%). By industrial segment in 1HFY23, smartphone/ mobile devices: 64% (1HFY22: 65%), datacom: 12% (12%), auto: 11% (11%), industrial: 7% (7%) and generic: 6% (5%).

Outlook. In Nov 2022, WSTS projected global semiconductor market to decline by 4.1% to USD557bn in 2023. While in Jan 2023, Gartner forecasted smartphone sales to fall 4.4% in 2023. Given the depressed macroeconomic environment and slowdown in the overall semiconductor market, Inari remains cautious on its recurring RF and opto businesses. It continues to work on new opportunities coming onshore into Malaysia’s OSAT ecosystem at the same time bringing up new China JV site in Yiwu to commence manufacturing operations in 2HFY24. The ongoing volatility of USD may add headwind to its performance in FY23.

Forecast. Unchanged.

Maintain HOLD with unchanged TP of RM2.48, based on PE multiple of 25x of FY23 EPS. Although we strongly believe that iPhone 5G super cycle will continue while opto division is expected to improve with more customer diversifications and partnerships, Inari’s risk and reward profile is balanced at current juncture.

Source: Hong Leong Investment Bank Research - 27 Feb 2023