• Upgrade to BUY from Neutral, with a higher MYR3.62 TP from MYR2.31, 19% upside and c.3% FY24F (Jun) yield. While near-term challenges on lacklustre smartphone shipment should continue, a more hopeful FY24F will be driven by new programmes/customers and expansions in China. We lift FY24F-25F as we roll forward our valuation base year to CY24 and raise our P/E to 31x (+1.5SD from the 5-year mean) from 24x on Inari Amertron’s portfolio diversification strategy and peaking of the Federal Funds Rate.

• Earnings recap. 9MFY23 core earnings of MYR255m (-15.7% YoY) missed estimates due to a more pronounced slowdown in volume loading and margin (-2.5ppts). Revenue dropped by 12.9% YoY to MYR1.06bn from the sector’s slowdown amid lacklustre demand for consumer devices. 3QFY23 revenue and core profit fell 23.5% YoY and 41% YoY, with weaknesses seen in the radio frequency (RF) and optoelectronic businesses.

• Challenging outlook on smartphone market. IDC recently lowered worldwide smartphone shipments to a 3.2% decline from 1.1% decline in 2023, noting factors of the revision as major OEMs all point to a recovery being pushed further out and weaker second half of the year. While a seasonally stronger QoQ performance can be expected in 4Q/2HCY23, the smartphone market remains subdued on an uncertain outlook and a more pronounced sector slowdown.

• New projects to drive FY24F. New power module on the system-on- module platform, sensors, memory, and power LED are among the new programmes to drive growth in FY24. Besides, new opto-related products in optical transceiver and silicon photonics will drive Amertron Philippines’ performance. Depending on volume loading and timing of mass production, these new programmes could contribute up to 10% of group revenue.

• Updates on JVs. Its 54.5%-owned Yiwu Semiconductor International Corp plant on an 11.5-acre land is on track for completion by 1HFY24, with customer audit by 2QFY24. Management expects a quick production ramp- up supported by local Chinese companies in the smartphone and automotive sectors. The 51%-owned Inari MIT has commenced operations at plant P21 with various new product launches in customised machining such as die attach, wire bonding AOI, moulding and laser marking system. All the core design for mechanical, electrical and software are done in-house.

• Expansion plans. With all the programmes taking up the space in P34, INRI is now constructing a new 11-storey building (seven production levels) at P34 Block D, which would bring the P34 plant to 1m sq ft in total. Besides, a new 5-acre land at close proximity to P34 is identified for a new plant construction. At Amertron Philippines, a new 4-storey building currently at the planning stage will cater for power module and optoelectronic products.

• We raise FY24F-25F by 5.7-14% after factoring in the contribution from the new product portfolio and its China JV. Our TP also includes a 2% ESG premium. Key downside risks are non-renewal of contract, unfavourable FX movements and weaker-than-expected orders.

Source: RHB Research - 3 Aug 2023