Investment Highlights

• We maintain BUY call on Inari Amertron (Inari) with an unchanged fair value (FV) of RM3.53/share, based on unchanged FY24F of PE of 27x – 1 std dev above its 5-year median. We continue to ascribe a 4-star ESG rating, which translates to a 3% premium to Inari’s FV (Exhibit 4).

• The group’s 1QFY24 earnings of RM86mil accounted for 21% of our full year estimate and 22% of the consensus forecast. We deem the earnings to be within expectation as subsequent quarter expected to be seasonally stronger, hence, maintained FY24F-FY26F earnings. This is due to our expectation of higher earnings contribution from the radio frequency (RF) segment on the new smartphone launches.

• The group declared an interim dividend of 2.2 sen per share, as expected.

• YoY,1QFY24 revenue improved marginally by 2% thanks to better loading volume from its RF segment on new smartphone launches. However, its net profit declined by 15% YoY, impacted by lower production yield caused by power interruption together with higher depreciation charges and operating costs, driven by increased electricity expenses.

• On a QoQ basis, 1QFY24 revenue improved by 29% thanks to higher sales growth in RF segment which we believe was likely due to the launch of new 5G-enabled smartphone models. With the better production yield that drove up gross margin by 6.1%-point QoQ to 24% and effective tax rate decline of 1.1%-point to 4.9%, 1QFY24 net profit rose by 32% QoQ.

• Looking ahead, we are cautiously optimistic on its RF business segment which constitutes 63% of total 1QFY24 revenue vs. 59% in 4QFY23. We expect bumpy quarters ahead as consumer electronics sentiments remain soft. However, we foresee continuous growth over the long term, driven by increasing content requirements for RF filters, particularly with higher complexity needed for new generations of 5G-and-beyond devices.

• In addition, the company has successfully secured a few new customers, all of whom are involved in a similar product range, paving the way for new production innovations with their technical know-how. Anticipating maiden contributions in 2024 and beyond, these new customers undergird stronger growth prospects for Inari.

• From a valuation perspective, the stock currently trades at an attractive FY24F PE of 27x vs its 3-year peak of over 30x.

Source: AmInvest Research - 23 Nov 2023