INARI has overcome the learning curve of the new RF packages for the new smartphone of its key US customer and is ready to cope with larger orders ahead of the year-end shopping season. Its production is currently running at 90% utilisation (vs. 80% in 1QFY24). We keep our earnings forecast, TP of RM4.17, and OUTPERFORM call.

We came away from INARI’s post-1QFY24 results briefing reassured of its positive outlook. The key takeaways are as follows:

1. While INARI’s 1QFY24 was satisfactory, we learnt that the results could have been better if not for challenges encountered during the initial learning phase of the new radio frequency (RF) filter packages. These new packages were allocated by its key customer to accommodate more frequency bands in the latest US flagship smartphone. The learning curve challenge was further exacerbated by a few days of power disruption during the ramp-up period. As such, the group estimated revenue loss of approximately RM20m. Thankfully, INARI has addressed the issues and expressed confidence in delivering the shortfall in the next quarter coupled with expected higher demand for the US smartphones during the year-end shopping season. As a result, the utilisation rate for RF has increased to around 90%, compared to the c.80% reported in the recently concluded 1QFY24.

2. Moreover, the group continues to observe a gradual uptick in orders for the optical communication segment (c.13% of group revenue). This improvement is linked to the renewed deployment activities among hyperscalers, sparked by the growing importance of artificial intelligence (AI). Concurrently, INARI’s first production line for the new memory customer has been successfully qualified and was instructed to expedite the deployment of another four lines in plant P34. INARI still holds its forecasted contribution of RM150m from these new clients, with half of it likely to come from the memory product.

3. Its 54.5%-owned Yiwu Semiconductor International Corp (YSIC)’s plant is now undergoing equipment installation and will conduct the opening ceremony by mid-Dec 2023. The company aims to start the initial production for a new client (smartphone related) in mid-2024. The group’s target is to achieve listing status in China within the next five years, accompanied by the milestone of reaching RMB1b revenue.

Forecasts. Maintained

We also keep our TP of RM4.17 based on an unchanged FY25F PER of 32x. Our valuation reflects a 10% premium on peer’s forward mean, justified by the company's superior net margins of >20%, (vs. peers of single digit). 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. Maintain

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 - 24 Nov 2023