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.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....