INARI’s 1QFY24 results met expectations. It showed strong sequential performance with 1QFY24 top line and core net profit growing 29% and 32%, respectively. It remains optimistic on its growth prospects underpinned by the resilient demand for its RF filters. We keep our forecasts, TP of RM4.17 and OUTPERFORM call.

Within expectations. INARI’s 1QFY24 core net profit of RM85.8m (- 14.6% YoY) was in line with expectations at 22% each of our full-year forecast and the full-year consensus estimate.

Results’ highlights. YoY, INARI's 1QFY24 revenue saw a modest increase of 1.8% on robust demand for its radio frequency (RF) filters, which constituted c.59% of the group’s revenue. The healthy loading volume can be attributed to the recent launch of the latest US flagship smartphone in September. However, net profit experienced a 14.6% decline due to the impact of higher electricity tariffs that took effect early in 2023. Despite this, INARI has demonstrated superior performance in managing increased operating costs compared to peers, maintaining net profit margin above the 20% mark, while peers are in the single digits.

QoQ, the group’s net profit growth (+31.9%) outpaced its revenue growth (+28.5%) as it continued to optimise its current facility to cushion the higher electricity cost.

Optimistic for growth. As the year-end shopping season draws near, we anticipate sustained interest in the new US flagship smartphone. The positive outlook is reinforced by promising order forecasts from its direct client, Customer B, particularly for RF filters. The increased demand for RF filters can be attributed to additional frequency bands implemented in the latest U.S. smartphones. Moreover, INARI is making encouraging strides in its recent business ventures, including power module packages, memory chips, optical transceivers, and the building of a new factory in China. Many of these products are currently in advanced qualification and sampling stages, poised to make a positive impact in FY24 and FY25 as they gradually ramp up.

Forecasts. Maintained

We also keep our TP of RM4.17 based on an unchanged FY25F PER of 32x. Our valuation reflects a 10% premium on peer’s forward mean, justified by the company's potential for a quicker recovery to its glory days compared to its peers. Additionally, its ability to preserve an impressive net margin of >20%, (vs. OSAT peers that are still struggling at single digit net margins) while continuing to grow its already large revenue base of >RM1.5b further underlines its exceptional capability, especially in the face of rising labour and utility costs. 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 roll-out of new technologies such as double-sided moulding (DSM) and system-onmodule (SOM), and (iii) its significant expansion in China, capitalising on the superpower’s aggressive push for semiconductor self-sufficiency. Maintain OUTPERFORM.

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 - 23 Nov 2023