• Stay NEUTRAL and MYR2.60 TP, 6% upside. Inari Amertron’s 1HFY23 (Jun) core earnings of MYR194.1m (-9.7% YoY) met expectations, with the slower YoY performance dragged down by lower volume loadings. We believe FY23 will be an uninspiring year for INRI with the decelerating demand for smartphone undermining profitability. Despite the recent run-up of the sector, current at-mean valuation is fair considering the uninspiring 2023 outlook, supported by the decent dividend yield of c.4%.

• Within expectations. 1HFY23 core earnings were at 51.3% and 49.5% of our and Street full-year estimates. A second interim DPS of 2.2 sen was declared (2QFY22: 2.8 sen) and will go ex on 15 Mar. The contraction in the volume loading for both the radio frequency (RF) and optoelectronic businesses in view of slower demand for end products contributed to the weaker revenue of MYR799.5m (-8.4% YoY) while bottomline was partially cushioned by higher interest income (+MYR11m YoY) and favourable FX movement.

• Slower loadings. 2QFY23 core earnings of MYR102.8m contracted by 6% YoY given the slowing topline (-4.2% YoY) amid weakening demand for optoelectronics products. Meanwhile, the marginally better QoQ (+2.2%) performance was attributable to the seasonal strong RF products given the ramped-up volume for the new version of a major smartphone brand. Overall EBITDA margin contracted due to realised FX loss on unfavourable FX movement. RF products made up 63% of the quarter revenue, followed by optolectronics (29%), and generic (8%) products.

• A challenging FY23F. Management remains cautious on the existing RF and optoelectronics businesses amid slowing demand for consumer electronic business, following Gartner’s forecast of a further 4.4% slide in smartphone sales in 2023. However, the higher interest income and favourable FX movement may partially cushion the slowdown. The group continues to work on new opportunities coming onshore into Malaysia’s OSAT ecosystem and, at the same time, bring up its new China JV site in Yiwu to begin manufacturing operations in 2HFY24.

• Forecasts and ratings. We keep our forecasts and TP of MYR2.60, which is inclusive of a 2% premium on its 3.1 ESG score, based on an unchanged 24x CY23F P/E (at 5-year mean). Maintain NEUTRAL as the macroeconomic headwinds, risk of contract non-renewal between its direct customer and the end-client, as well as slowdown in smartphone demand will drag its FY23 performance, while the stronger USD/MYR and decent dividend yield are the positives.

• Key upside/downside risks are stronger/weaker-than-expected 5G smartphone orders, renewal/non-renewal of contracts, and favourable/unfavourable FX movements.

Source: RHB Research - 27 Feb 2023