Review

• Inari’s 1QFY24 core net profit of RM85.8mn (+31.9% QoQ, -14.6% YoY) came below ours and consensus full-year estimates at 21.8% and 21.5%, respectively. On our end, results missed as the radio frequency (RF) segment’s improved loadings fell short of expectations. It is worth noting that historically Inari typically observes a seasonally stronger 1HFY (July to December) marked by the ramp-up of its RF segment in conjunction with its major US end-customer’s yearly new smartphone line-up.

• Inari declared a 1st interim dividend of 2.2sen (1QFY23: 2.6sen).

• YoY. 1QFY24’s revenue improved 1.8% YoY to RM383.9mn with growth from the RF segment (+6.9% YoY) more than offsetting weakness from the optoelectronics (-4.3% YoY) and generic (-12.7% YoY) segments. However, core net profit slipped 14.6% YoY to RM85.8mn, attributed to increased electricity tariffs and losses arising from glitches in electricity supply. While profitability suffered, with the core net profit margin narrowing 4.3pp YoY to 22.3%, it remained well above the industry average. As a % of total revenue, contributions were led by RF at 63% (+3pp YoY) and followed by optoelectronics at 31% (-2pp YoY) and generic at 6% (-1pp YoY).

• QoQ. 1QFY24’s revenue and core net profit increased 28.5% QoQ and 31.9% QoQ to RM383.9mn and RM85.8mn. This was driven by the pickup of the RF (37.2% QoQ) and optoelectronics (+20.7% QoQ) segments. Although weaker-than-expected, the RF segment's ramp-up was ahead of a significant US end-customer's yearly new smartphone line-up.

• Meanwhile, Inari maintained a robust balance sheet with a net cash position of RM1,818.0mn (-0.7% QoQ, -11.5% YoY) as of end-1QFY24.

Impact

• We have cut our FY24F/FY25F earnings forecast by -12.1%/-3.9% upon lowering revenue to reflect actual 1QFY24F results.

Outlook

• Going forward, we continue to view prospects for Inari from i) the nascent 5G smartphone upgrade cycle, with the growing RF content demanded within 5G handsets and the ongoing migration to 5G handsets expected to benefit its core RF segment, ii) new product introduction, and iii) customer diversification efforts facilitated by the China Plus One strategy.

• Meanwhile, the group has extended the time to utilise the proceeds raised from its private placement exercise in 2021 by another 24 months, from 30 January 2024 to 29 January 2026. Of the RM1.0bn raised for capital expenditure, acquisitions, and investments, it has utilised RM378.5mn.

Valuation & Recommendation

• Corresponding to our earnings downgrade, our TP for Inari is lowered to RM3.25 (previously RM3.50) based on a PE multiple of 30.0x CY24F EPS, which is closely in line with the stock’s 5-year mean. And given the narrowed risk-reward potential, we downgrade our recommendation on Inari from Buy to Hold.

• Key downside risks include geopolitical tensions weighing on economic growth and disrupting supply chains, strengthening of the Ringgit against the USD, surge in commodity prices, and material shortages.

Source: TA Research - 23 Nov 2023