INARI’s 1HFY23 results met expectations. Revenue dipped 8.4% due to weaker demand for radio frequency (RF) and optoelectronics products as consumers’ enthusiasm for new smartphones waned during the last Christmas shopping season. Meanwhile, INARI’s new ventures will not significantly cushion the slowdown in its RF and optoelectronics segments. We maintain our forecasts, TP of RM2.60 and MARKET PERFORM call.

Within expectations. 1HFY23 net profit of RM196.5m (-8.6% YoY) is inline with expectations at 52% and 50% of our full-year forecast and the full-year consensus estimate, respectively.

Results’ highlights. YoY, 1HFY23 revenue was down 8.4% while its core net profit fell by 8.6% on reduced orders for its RF filters as well as optoelectronics products as the demand for the latest US smartphone was dampened by cooling consumer demand as well as supply-chain issues. The decline could have been worse had INARI not been able to increase the output of its older RF models. However, this strategy resulted in slightly lower margins as seen in the quarter YoY comparison where net profit margin was 0.8ppt lower at 25.5% despite being a Christmas quarter when demand is typically strong. Not surprisingly, IDC reported that the US smartphone manufacturer sold 14.9% less devices during the 2022 Christmas quarter, vs. a year ago.

Bleak outlook for smartphones. With the smartphone segment being a mature product in the tech space, we believe the incremental upgrades pushed by smartphone manufacturers on a yearly basis will no longer stimulate as much demand as it used to do. Gartner, for instance, is also expecting the slowdown in global smartphones to extend into 2023 with a 4.4% decline following an 11.9% drop in the prior year.

Forecasts. Maintained.

Investment thesis. We like INARI for: (i) it being the closest proxy to 5G adoption, (ii) it being highly responsive to the market demand with the rollout of new technologies such as double-sided moulding (DSM) and system-on-module (SOM), and (iii) its significant expansion in China, capitalising on the superpower’s aggressive push for semiconductor self-sufficiency. However, we remain cautious due to the waning consumer demand in the smartphone market while its JV venture may not contribute soon enough.

Maintain MARKET PERFORM with an unchanged TP of RM2.60 based on 23x CY23F PER, which is in line with peers’ forward mean. Our TP imputes a 5% premium to reflect its 4-star ESG rating as appraised by us (see Page 4).

Risks to our call include: (i) better-than-expected response to its new offerings by its key customer, (ii) easing in supply-chain disruptions, and (iii) expansion in China coming onstream sooner-than-expected.

Source: Kenanga Research - 27 Feb 2023