• Maintain BUY, with new MYR3.60 TP from MYR3.58, 11% upside and 3% FY25F (Jun) yield. 9MFY24 core earnings of MYR247.1m (-3.1% YoY) was a miss, undermined by margin compression due to additional input costs (additional staff, materials for new product development, etc). We cut FY24F-26F earnings as we dial back the assumptions on EBITDA margins and the timeline on Inari Amertron’s China venture. We still like INRI for its various product and plant expansion plans in place to capture the growth opportunities in the new semiconductor upcycle.

• Weighted down by margin. 9MFY24 core earnings missed expectations at 69.8% and 69.5% of our and Street’s full-year estimates due to the weaker- than-expected margin. The higher revenue (+8.6 YoY) was supported by higher volume loadings in the radio frequency (RF) and optoelectronic businesses as well as favourable FX. However, additional fixed costs from new hiring and set up costs for new product development, coupled with the glitches in electricity supply undermined 9MFY24 EBITDA margin to 26.2% (from 30.8% in 9MFY23). A third interim DPS of 1.9 sen was declared (3QFY23: 1.4 sen), ex-date on 7 Jun.

• Sustained loadings. RF products made up 60% of 3QFY24 revenue, followed by optoelectronic products of 34%, and 6% of legacy and generic integrated circuits. The sustained strong loadings in the RF and optoelectronic businesses as well as favourable FX movement supported the YoY growth in revenue (+26%) and core profit (+38.1%). However, revenue (-16%) and core earnings (-20.5%) were down sequentially due to lower loadings on seasonality.

• Look forward to FY25F. Despite the muted earnings growth expected for FY24F given the higher input costs stemming from new technology development, new product lines setup, investors should look forward to a more exciting FY25F outlook with more substantial contributions from new products in the memory, power management modules and high-power light- emitting diode products. Besides, the 54.5%-owned Yiwu Semiconductor International Corp plant in China is only expected to contribute by FY25F with its maiden customer coming from the consumer electronic space.

• Forecasts and ratings. FY24F-26F earnings are cut by 7.6%, 13.4%, and 10% on weaker margin and slower ramp-up of operations at the new plant in Yiwu. However, our TP is up marginally to MYR3.60 (from MYR3.58) as we roll forward the valuation base year to FY25F, based on an unchanged 31x P/E (+1.5SD from its 5-year mean). Note: A 2% ESG premium is baked into our TP, given that the ESG score of 3.1 is above the country median.

• Key downside risks are weaker-than-expected 5G smartphone orders, non- renewal of contracts, low production yield, and unfavourable FX movement.

Source: RHB Research - 24 May 2024