INARI expects an improvement in 4QFY23 performance as it initiates the production of RF filters for the up-coming US flagship smartphone. However, the same cannot be said for other business segments which are still grappling with order deferments, while contributions from new ventures will not turn meaningful anytime soon. We maintain our forecasts, TP of RM2.46 and MARKET PERFORM call.

We came away from INARI’s post-3QFY23 results briefing with mixed feelings about its prospects. The key takeaways are as follows:

1. INARI anticipates its upcoming 4QFY23 to see QoQ improvements driven by the initial production ramp-up of radio frequency (RF) filters in  June for the upcoming US flagship smartphone. Furthermore, the group anticipates benefiting from a higher allocation by its Customer B,  reflecting a c.15% increase in RF filter components per smartphone.  This aligns with the announcement made by the US smartphone manufacturer that it will continue to source wireless components from  Customer B which in turn signifies a continuation of RF business (c.62%  of group revenue) for the group.
    
2. Meanwhile, the optical communication segment (c.14% of group revenue) is anticipated to face a further slowdown due to the delayed deployment of high-speed optical transceivers (100G - 400G) among hyperscalers. Consequently, there has been a decrease in order replenishment from customers at this juncture as they prioritise reducing existing inventories. Based on discussions with customers, INARI  expects the orders to gradually recover in 1HFY24.
    
3. The group is currently in the process of establishing production lines for its new customer in the memory segment, with completion expected by  August 2023. Simultaneously, the production of high-powered LEDs for another new customer is progressing well on schedule. In fact, it has garnered attention from the parent company, which is exploring the possibility of placing orders for silicon carbide (SiC) related LEDs and power modules. However, it's important to note that these discussions are still at the early negotiation stage.
    
4. INARI has hired 30 employees for the new incoming capacity in its  54.5%-owned Yiwu Semiconductor International Corp’s (YSIC)’s plant in  China which is scheduled for completion by 2QFY24, followed by customer audit.

Forecasts. Maintained.

We also maintain our TP of RM2.46 based on 23x FY24F PER, which is in line with peers’ forward mean. Our TP imputes a 5% premium to reflect its 4- star ESG rating as appraised by us (see Page 4).

Investment thesis. We like INARI for: (i) it being the closest proxy to 5G  adoption, (ii) it being highly responsive to the market demand with the rollout of new technologies such as double-sided moulding (DSM) and system-on-module (SOM), and (iii) its significant expansion in China, capitalising on the superpower’s aggressive push for semiconductor self-sufficiency. However,  we remain cautious due to the waning consumer demand in the smartphone market while its new ventures may not contribute soon enough. Maintain MARKET PERFORM.

Risks to our call include: (i) new offerings not well received by key customers, (ii) new supply-chain disruptions, and (iii) delays in its expansion in China.

Source: Kenanga Research - 29 May 2023