INARI’S production of RF filters hits above 85% utilisation for an upcoming US flagship smartphone. Its optical communication segment is rebounding as hyperscalers prepare for AI-readiness. Its China venture has set RMB1b revenue target by 2028. We raise our FY24-25F net profit by 3% and 7%, respectively, lift our TP by 30% to RM4.17 (from RM3.20). Upgrade to OUTPERFORM from MARKET PERFORM.

We came away from INARI’s post-3QFY23 results briefing strongly convinced that it has turned the corner. The key takeaways are as follows:

1. INARI is firing on all cylinders as it ramps up the production of radio frequency (RF) filters in anticipation for the upcoming US flagship smartphone. Despite some contradictory media reports, INARI remains optimistic given the firm orders received from Customer B. This is supported by a 5%-8% higher RF content per device driven by expanded support of additional frequency bands in the upcoming smartphone. Therefore, its utilisation rate for RF has surged beyond 85% (vs. 65% in the recently reported 4QFY23) and is expected to climb even further into 1HFY24.

2. The group is also experiencing a gradual uptick in orders for the optical communication segment (c.14% of group revenue) on resumed deployment among hyperscalers with the emergence of artificial intelligence (AI). Additionally, INARI has completed setting up a highvolume production line for its new memory customer in 4QFY23, with four more lines to follow in P34. The group estimates RM150m contribution from its new customers with half of it stemming from the memory product alone.

3. Its 54.5%-owned Yiwu Semiconductor International Corp (YSIC)’s plant in China has been completed, with equipment installation now underway and an expected readiness date in 4QCY23. The company's ambitious target is to achieve listing in China within the next five years, accompanied by the milestone of reaching RMB1b in revenue before its public offering.

Forecasts. Increase FY24F-25F earnings by 3% and 7%, respectively.

We raise our TP by 30% to RM4.17 (from RM3.20), based on a higher rolledforward FY25F PER of 32x (from 30x). Our valuation reflects a 10% premium on peer’s forward mean, justified by the company's potential for a quicker recovery to its glory days compared to its peers. Additionally, its ability to preserve an impressive net margin of c.25%, (vs. industry average of 17%) while continuing to grow its already large revenue base of >RM1.5b further underlines its exceptional capability, especially in the face of rising labour and utility costs. Our TP imputes a 5% premium to reflect its 4-star ESG rating as appraised by us (see Page 4).

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 roll-out of new technologies such as double-sided moulding (DSM) and system-onmodule (SOM), and (iii) its significant expansion in China, capitalising on the superpower’s aggressive push for semiconductor self-sufficiency. Upgrade from MARKET PERFORM to OUTPERFORM.

Risks to our call include: (i) new offerings not well received by key customers, (ii) new supply-chain disruptions, and (iii) delays in its expansion in China.

Source: Kenanga Research - 1 Sept 2023