• D/G to NEUTRAL from Buy, new MYR2.78 TP from MYR3.54, 13% upside. We factor in the semiconductor market’s slowdown, global growth challenges, and in-house bond yield and FX assumptions. We like Inari Amertron as a proxy to the technology sector in the FBM KLCI and China venture’s medium-term growth, but recognise the current unfavourable market conditions, demand uncertainty, and overhang from expiry of current wireless component supply with major smartphone customers in mid-2023.

• FY22 (Jun) results recap. Revenue of MYR1,547.9m (+8.3% YoY) and core earnings of MYR388.4m (+19.8% YoY) met expectations, fuelled by higher loading for the radio frequency (RF) segment stemming from stronger smartphone demand, growing chips content and tests required, as well as margins expansion on economies of scale and favourable FX movements.

• Moderating growth in FY23. We expect growth to moderate into FY23 with minimum limited volume growth from the RF segment on potentially slowing smartphone sales during this period. Overall, growth in this period could stem from improved contributions from optoelectronic and generic products, contribution from new customers, and favourable FX movements.

• There could be a lingering risk from the supply of wireless components to the major smartphone brand via INRI’s largest customer – the current contract expires in mid-2023 – if a further deal cannot be reached or there is a reduction of contracted components. Should this key customer opt for an end-to-end solution (front-end and back-end) made available by closest competitor Qualcomm or successfully develop its own in-house solutions, this may post a significant earnings risk to INRI.

• Update on China venture. We understand its 54.5%-owned JV with China Fortune-Tech Capital – to expand its China footprint – is progressing well. The share capital injection and JV agreement is expected to be finalised by 2022 after being dragged by the protracted lockdowns in the East Asian nation. The building construction on 11 acres of land has begun with ground works and is expected to be ready by 2HCY23.

• We downgrade to NEUTRAL on macro headwinds, risk of contract non- renewal, slowdown in the semiconductor market, and continued hawkish tone by the US Federal Reserve, which contributes to the rising bond yield that will continue to dampen the equity valuation in our view. The stronger USD/MYR is the silver lining to cushion any potential slowdown in volume loadings. Our FY23F-24F earnings are revised 6.3% and 10% downwards, mainly to reflect lower volume loadings and new CY23 USD/MYR FX assumptions of 4.652. We also trim target P/E to its 5-year mean of 24x FY23F from 30x in view of the factors above. This results in a lower MYR2.78 TP – inclusive of a 2% premium on its 3.1 ESG score. Key risks are stronger-/weaker-than-expected 5G smartphone orders, renewal/non- renewal of contract, and favourable/unfavourable FX movements.

Source: RHB Research - 12 Oct 2022