• We turn cautious on Inari Amerton Berhad’s (Inari) near-term outlook amid China’s sluggish consumer electrical and electronics (E&E) recovery and pricing pressure from local Chinese players, which are expected to weigh on its earnings.

• While we applaud Inari’s ongoing strategic investments in advanced technologies and expansion for future positioning, we remain concerned on its short-term margin constraint.

• Downgrade to HOLD (from BUY) at a lower target price (TP) of RM2.69, pegged at unchanged PER of 34x on FY25F EPS of 7.9sen.

Slower E&E Recovery and Price War in China, Weigh on Inari

Inari Amertron Berhad’s (Inari) is navigating a tough operating environment in China, intensified by the slower-than-expected economic recovery, especially within the consumer electrical and electronics (E&E) segment. The ongoing mismatch between demand and supply in this industry is weighing on order volumes - a trend we anticipate will persist in the near term. Given Inari's heavy reliance on its RF segment, which contributes approximately 60%-70% of total revenue – the company may face heightened exposure to these market challenges. Moreover, Inari is also facing challenges due to price war amid intense competition from local players in China, resulting to lower average selling prices (ASP). Consequently, we expect some pressure for Inari in maintaining its robust margins.

Future Investments at the Expenses of Short-term Margins

Inari’s substantial investments in technology advancements and capacity expansion highlight its commitment to securing long term growth opportunities. These efforts include the development of new facilities, integration of advanced technologies, and the adoption of cutting-edge silicon photonics. However, in our view, these initiatives are capital-intensive and may continue to pressure operating margins in the short term. Additionally, Inari's proactive positioning for future growth in silicon carbide power management and AI-driven applications reflects its strategic foresight, but we remain cautious about the execution risks associated with these emerging segments. As these shifts are still in their infancy, we expect earnings visibility from these ventures to materialize only from FY26F onwards, limiting short to medium term upside.

Downgrade to HOLD with a lower TP of RM2.69 (from RM4.45)

We cut FY25F/26F’s earnings by 40%/37%, respectively, to account for lower margins and revised USDMYR assumption of 4.20 (from 4.40 previously). As a results, we downgrade our recommendation to HOLD (from BUY), with a lower target price (TP) of RM2.69 (from RM4.45). This valuation is derived from an unchanged PER of 34x, applied to FY25F EPS of 7.9sen. While Inari’s long-term prospects remain promising, the near-term headwinds from China’s slower recovery, demand-supply mismatches, and margin compression warrant a more cautious stance.

Source: BIMB Securities Research - 29 Nov 2024