Investment Highlights

• We maintain BUY call on Inari Amertron (Inari) with a lower fair value (FV) of RM2.80/share (from RM3.72/share),  pegged to an unchanged target PE of 25x based on revised  CY23F EPS. We continue to ascribe a 4-star ESG rating,  which translates to a 3% premium to Inari’s FV (Exhibit 4).

• We cut FY23F earnings by 27%, FY24F by 17% and FY25F  by 14% as Inari’s 3QFY23 results came out below  expectations. We are imputing more conservative sales  assumptions and a gradual recovery following the  weakness of smartphone demand in our revised forecasts.

• The group’s 9MFY23 core net profit of RM255mil (-16%  YoY) formed 59% of our previous full-year FY23F earnings  and 66% of consensus. The negative variance is mainly  attributed to softer loading volume across all segments.  The group’s 9MFY23 revenue of RM1,055mil fell short of  our expectation, attributing only 63% of our estimate. 

• YoY, the group’s 3QFY23 earnings declined 48%, in  tandem with a 24% contraction in revenue to RM276mil.  The group’s gross margin deteriorated 8%-points YoY as  the drop in loading volume impacted economies of scale.

• On a QoQ basis, 3QFY23 revenue declined 32%,  predominantly driven by a drop in radio frequency orders due to softer smartphone demand as well as weaker  contribution from optoelectronics unit.

• Despite the subpar 3QFY23 performance, we remain  positive on Inari’s longer-term prospects. Broadcom  securing a multibillion-dollar contract with a North  American smartphone maker bodes well for Inari. The  group’s prospects stem from the long-term resiliency of  its radio frequency (RF) earnings and margin due to higher  chip complexity in 5G devices and applications.

• Moreover, with 2 additional power system-on-module lines  in the group’s P34 plant, the automotive segment is  gradually ramping up. Hence, we positively view the  group’s diversification effort into this segment. 

• The company also plans to further enhance and diversify  revenue streams via joint ventures in outsourced  semiconductor assembly and test manufacturing  operations in China.

• From valuation perspective, the stock currently trades at  an attractive CY23F PE of 21x vs its 5-year mean of 28x.  The group’s long-term prospects are further underpinned  by its formidable net cash position of RM2bil as at  December 2022, which translates to 24% of its market  capitalisation.  

Source: AmInvest Research - 26 May 2023