• Maintain NEUTRAL and MYR3.06 TP, 3% upside and c.3% FY25F (Jun) yield. 1QFY25 core earnings of MY71.4m (-4.4% YoY) were below expectation, dragged by margin compression on FX and additional input costs from new product development despite a healthy revenue growth trend from content growth. A third interim DPS of MYR0.01 was declared (1QFY24: 2.2 sen). The current valuation is fair after weighing against the growth outlook and potential downside risk on margins and execution with contributions from new projects back-loaded to FY26.

• Missed expectations. 1QFY25 core profit of MY71.4m came in at 19.5% and 18% of our and Street’s full-year estimates due to weaker-than-expected margins and unfavourable FX. This was despite the higher revenue of MYR388m (+16.5 YoY), which was supported by stronger volume loadings and content growth in the radio frequency (RF) segment. Meanwhile, the sequentially improvement in core profit (+21.3% QoQ) was driven by seasonally strong loadings for Inari Amertron’s smartphone and RF segments. 1Q revenue comprised 65% of RF products, followed by optoelectronic products (28%), and legacy and generic integrated circuits (7%). However, EBITDA margin contracted to 22.8% (1QFY24: 29.4%) due to additional fixed costs from new hires and set-up costs for new products development in advanced packaging, coupled with the unfavourable FX.

• Outlook. Despite the unexciting volume growth for the new premium smartphone range, we believe INRI will be cushioned by content growth and longer testing time. Besides, there could be a potential upside from the staggered release of nascent artificial intelligence or AI features and new budget phone range to be launched in 1HCY25. A stronger 2HFY25 for the optoelectronic segment from both fibre optic and power LED products are expected with more significant contributions to come in FY26. On the Yiwu JV, the ramp-up is gradual, with small volume manufacturing for a customer. High volume manufacturing may only to begin in CY25, with volume commitments after certain changes in engineering processes are implemented.

• Forecasts and TP. We revised down our FY25F-27F earnings by 10.7%, 3%, and 2% after incorporating lower margins and latest in-house MYR/USD assumption to 4.30 from 4.20 previously. Our TP is unchanged at MYR3.06 as we roll forward our valuation base year to CY25, based on an unchanged 31x P/E (+1.5SD from its 5-year mean). Note: A 2% ESG premium has been baked into our TP, as INRI’s ESG score of 3.1 is above the country median.

• Downside/upside risks to our call include slower-/stronger-than-expected orders and yields, and unfavourable/favourable FX movements. Non-renewal of contracts and technology obsolescence are also downside risks

Source: RHB Securities Research - 28 Nov 2024