• D/G to NEUTRAL from Buy, unchanged MYR3.60 TP, 7% downside and 3% FY25F (Jun) yield. We expect subdued near-term earnings growth for Inari Amertron, with a brighter FY25F driven by anticipated contributions from new products and expansion. A 25% FY25 growth expectation is now stood against a peak forward P/E of 34x (+2SD above 5-year mean), which we believe the optimism from the new smartphone range with AI feature is in the price with risk on underscoring expectation. We still like INRI for its growth opportunities in the new upcycle, but prefer to accumulate at lower levels.

• Earnings recap. 9MFY24 core earnings missed expectations due to weaker- than-expected margin, despite higher revenue and favourable FX. Management attributed the additional fixed costs from new hiring and set up costs for future product development, alongside disruptions in electricity supply, to dampening the 9MFY24 EBITDA margin.

• Downside risks. Lacklustre volume growth in major smartphones amidst intense competition and trade tensions suggests limited near-term earnings potential, especially if new customers/project contributions fall short of expectations. Potential risks to the 25% growth forecast for FY25 include underperformance of the new major smartphone range with the hype built- in on embedded AI features but with little transformation changes to back it up. Besides this, the delays or lower contribution from its Yiwu expansion in China (we factored in a MYR150m revenue contribution in FY25), coupled with the slower-than-expected ramp up and margins for new memory and optoelectronics could pose other downside risks to expectation, while Edge AI and Solar-related ventures are still at infancy stage.

• Upside risks. Conversely, the upside risks could arise from a rebound in flagship smartphone sale in China due to the supply bottlenecks for national brand and aggressive discounts on various platforms. Additionally, stronger demand for new US-based flagship phone expected in Sept/Oct with new AI features could point to an upside risk to the consensus’ 241m forecasted units in 2025 (from 210m-230m range in 2024). However, we caution that much of the anticipated 2025 volume growth is already factored into current prices given the 25% earnings growth projection.

• NEUTRAL now. The YTD rally (+29%) is driven by liquidity and sentiment, with expectations centred around new smartphone technologies, memory products, power management modules, high-power LED products, Edge AI, and China expansion are now built on a peak valuation range with less compelling risk-reward balance. We keep our MYR3.60 TP, based on an unchanged 31x P/E (+1.5SD from its 5-year mean), and a 2% ESG premium baked into our TP, given that the ESG score of 3.1 is above the country median. Key risks are stronger/weaker-than-expected smartphone sale, favourable/unfavourable FX movement, production yield, and cost pressure.

Source: RHB Research - 4 Jul 2024