INARI’s 1HFY24 results met expectations. Its 1HFY24 core net profit eased 14% largely due to higher electricity tariffs and some production loss owing to power surges from the grid, while its top line grew 2% on a decent year-end shopping season. It guided for sustained strong demand for its radio frequency (RF) filters. We keep our forecasts, TP of RM4.17 and OUTPERFORM call.

Within expectations. INARI’s 1HFY24 core net profit of RM175.9m (- 13.5% YoY) met expectations at 45% and 48% of our full-year forecast and the full-year consensus estimate, respectively. This was despite some production loss due to power surges from the grid.

YoY, INARI's 1HFY24 revenue witnessed a modest increase of 2.4%, driven by robust demand for its RF filters, constituting c.60% of the group’s revenue. The substantial loading volume can be attributed to the newly launched US flagship smartphone in September, benefiting from the seasonal year-end shopping season.

However, its core net profit eased 14% due to higher electricity tariffs and production loss due to power surges from the grid (which have since been rectified). INARI managed to cushion the impact through efficiency, which could be seen in its net profit margin being sustained at above the 20% mark (vs. single-digit achieved by its peers).

QoQ, its core net profit grew 5% on the back of an 8% expansion in its top line due to the seasonally strong Oct-Dec period.

Outlook. INARI has defied the odds where the market was initially anticipating weaker sales of the US smartphone in the year-end period to weigh on its results. We believe this was possible thanks to the fact that INARI’s ability to continue to enhance its customer’s stickiness as well as its ability to mitigate any unforeseen circumstances in a short period to ensure production efficiencies were upheld. INARI is also making encouraging strides in its recent business ventures, including power module packages, memory chips, optical transceivers, and the building of a new factory in China. Many of these products are currently in advanced qualification and sampling stages, poised to make a positive impact in FY24 and FY25 as productions are gradually ramped up.

Forecasts. Maintained

Valuations. 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 potential for a quicker recovery to its glory days compared to its peers. Additionally, its ability to preserve an impressive net margin of >20%, (vs. OSAT peers that are still struggling at single-digit net margins) 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 case. 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 - 27 Feb 2024