RHB Investment Research Reports

Inari Amertron - Margin Undermined by New Products’ Ramp Up

Publish date: Tue, 27 Feb 2024, 11:51 AM
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  • Maintain BUY, with new MYR3.58 TP from MYR3.62, 13% upside and c.3% FY24F (Jun) yield. 1HFY24 core earnings of MYR175.6m (-13.6% YoY) was a slight miss, undermined by margin compression due to additional input costs (electricity, additional staff and machinery for new product development), despite a flattish topline. We trim FY24F by 5% on a more conservative margin assumption. Overall, we are still hopeful for a better FY24, driven by new programmes and the maiden contribution from its new JV in China.
  • A slight miss. 1HFY24 revenue of MYR798bn (+2.4%) and core earnings was a minor miss at 47.2% and 47.8% of our and Street full-year estimates due to the weaker-than-expected margin, in view of the seasonally stronger 1H from the ramp-up of certain premium smartphone brands. Topline was flattish (+2.4% YoY) with less exciting gadget sales, cushioned by the increase in content and stronger USD against MYR. However, additional fixed costs from new hiring and set up costs for new product development, coupled with the glitches in electricity supply undermined 1HFY24 EBITDA margin to 26.5% (from 33% in 1HFY23). A second interim DPS of 2.2 sen was declared (2QFY23: 2.2 sen), ex-date on 13 Mar.
  • Sustained loadings. Radio frequency (RF) products made up 64% of 2QFY24 revenue, followed by optoelectronic products of 30%, and 6% of legacy and generic integrated circuits or ICs. The higher QoQ (+7.9%) and YoY (+2.9%) revenue of MYR414.1m were buoyed by sustained strong loadings from its customers in the RF and optoelectronic businesses, coupled with favourable FX movement. This contributed to the growth in QoQ core profit of MYR89.8m. However, YoY core earnings were weighed down by the higher electricity rates and new product set up costs. EBITDA margin was down to 25.7% (from 30.7% in 2QFY23) due to the above mentioned reasons.
  • FY24F earnings are expected to be supported by new memory products, System on Module for power management modules and high-power light- emitting diode or LED products. Also, the maiden contribution from its 54.5%-owned Yiwu Semiconductor International Corp plant in China is expected, with the ramp-up of the new System In Package or SiP line from a smartphone customer.
  • Forecasts and ratings. We cut our FY24F earnings by 4.9% on weaker margin, resulting in a lower MYR3.58 TP, based on an 31x CY24F P/E (+1.5SD from its 5-year mean) and a 2% ESG premium. Despite the unexciting smartphone market/sales, INRI’s stickier earnings profile is expected to contribute positively in FY24F given i) Its premium product exposure that fared relatively well, and ii) diversification strategy to other products and clients.
  • Key downside risks are weaker-than-expected 5G smartphone orders, non- renewal of contracts, low production yield, and unfavourable FX movement.

Source: RHB Research - 27 Feb 2024

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