• Maintain BUY and MYR3.62 TP, 20% upside with c.3% FY24F (Jun) yield. Inari Amertron’s FY23 core earnings of MYR320m (-17.4% YoY) met expectations. While overall smartphone shipments remain lacklustre, demand for the premium product is stickier and a more hopeful FY24F is underpinned by new programmes/customers and expansions in China. This stock is our pick for the semiconductor space for the beta strategy, amid improved market sentiment and a peaking US Federal Funds Rate.

• Within expectations. FY23 revenue of MYR1.35bn (-12.5%) and core earnings came up to 99.8% and 96.8% of our and Street full-year estimates. Topline fell YoY on the back of a slowdown in the semiconductor space and lacklustre sales of consumer devices, coupled with higher energy costs. Meanwhile, the decline in earnings was cushioned by higher interest income despite a 3.6ppt EBITDA margin contraction. A forth interim DPS of 2.0 sen was declared (4QFY22: 2.2 sen) and will go ex on 14 Sep.

• Better sequentially. Both revenue and core profit improved QoQ by 8.3% and 25.7% to MYR298.8m and MYR65m, respectively. The better showing was supported by a stronger loading factor for its radio frequency (RF) unit and favourable FX movements. 4QFY23 bottomline contracted 23.4% YoY as both the RF and optoelectronic businesses were impacted by a lower loading factor, and higher input costs (utility and staff costs).

• Challenging outlook for smartphone market. IDC recently cut its worldwide smartphone shipment growth estimate to -3.2% YoY for 2023, from -1.1% YoY. It noted that major original equipment manufacturers are all pointing to a recovery being pushed further out and a weaker 2H23. Still, a seasonally stronger QoQ showing can be expected in 4Q23/2H23 – buoyed by the launch of a new high-end smartphone brand. While the overall smartphone market may remain subdued on an uncertain outlook and a more pronounced sector slowdown, consumer stickiness on the premium smartphone brand could help cushion against further downside in demand.

• New projects diversify and drive FY24F earnings. Its 54.5%-owned Yiwu Semiconductor International Corp plant in China is on track for completion and will start contributing in 2HFY24. New power modules on the systemon-module platform, sensors, memory, and power LEDs 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, the new programmes could contribute up to 10% of group revenue.

• Forecasts and ratings. We maintain our forecasts, as the results are in line. Our TP of MYR3.62 is based on a CY24 P/E of 31x (+1.5SD from the 5-year mean) and includes a 2% ESG premium. Key downside risks are weaker-than-expected 5G smartphone orders and unfavourable FX movements.

Source: RHB Securities Research - 30 Aug 2023