Inari Amertron (Inari) registered a lower core profit of RM259.2m (YoY: - 12.9%) for 9MFY23, dragged by weaker sales contributions from radio frequency, optoelectronics and generic segments. Nevertheless, the results were broadly in line with our full-year expectation but below consensus forecast, making up 70.3% and 67.7%, respectively. Nevertheless, we cut our FY23-25F earnings forecast by 5-6% to reflect weaker sales volume across all the segments. Following the share price retracement, it is now trading at a forward PE of 20x, which is significantly below its 5-year average of 26x. We reiterate our Outperform call with a lower TP of RM3.53 based on 35x FY24 EPS. A lower third DPS of 1.4sen (vs 3QFY22: 2.2sen) was declared for the quarter.

• Weaker YoY sales. During the quarter, Inari’s revenue slipped 23.5% YoY to RM275.8m, dragged by weaker sales from i) radio frequency, ii) optoelectronics and iii) generic segments. Stripping out net foreign exchange gain of RM1.2m and gain on disposal of property, plant and equipment, 3QFY23 core earnings tumbled 35.6% YoY to RM55.9m, attributed to weaker earnings contributions from all core segments. Gross margin dropped from 30.5% to 22.5% on the back of lower utilization for the RF segment.

• The worst is over. Following a challenging quarter, we expect to see improving results in the subsequent quarters on the back of new smart phone cycle, which is expected to release the models in Sept. Meanwhile, efforts from the expansion of customer base and diversification of new product development should start contributing in the 2H of this year. Notably, we are upbeat on the partnership with YSIC in providing premium OSAT services for China. It could potentially contribute up to RMB1bn (RM650m) once it starts commercial operation by 4Q 2023.

• A huge relief. Apple has recently announced a new multibillion-dollar deal with Broadcom to develop 5G radio frequency components in the US. Under the multi-year deal, Broadcom will develop 5G radio frequency components with Apple that will be designed and built in several US facilities. Apple said it will tap on Broadcom for the film bulk acoustic resonator (FBAR) chips. The FBAR chips are part of a radio frequency system that helps iPhones and other Apple devices connect to mobile data networks. To recap, Apple was looking to cut its dependency on third-party chip supplies and replace them with chips developed internally. We believe the announcement of this new investment deal will remove the overhang on Inari outlook.

Source: PublicInvest Research - 26 May 2023