INARI’s 9MFY24 results disappointed. Its 9MFY24 core net profit eased 3% due to higher electricity cost and as it took a longer time to catch up with production following some operational glitches in 2QFY24. We take comfort in its improving utilisation rates. We cut our FY24-25F net profit forecasts by 5% and 2%, respectively, tweak our TP down by 1% to RM4.00 (from RM4.05) but maintain our OUTPERFORM call.

INARI’s 9MFY24 core net profit of RM247.6m (-3.1% YoY) missed expectations, coming in at only 67% and 70% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from a longer time to catch up with production following some operational glitches (i.e. sporadic electricity disruption) in the previous quarters.

YoY, INARI's 9MFY24 revenue rose 8.6%, driven by demand for its RF filters (c.63% of the group’s revenue) used in a US smartphone brand. However, its core net profit eased 3.1% due to higher electricity cost and as it took a longer time to catch up with production following the disruption from power surges in 2QFY24.

QoQ, its 3QFY24 revenue dipped 16% on seasonally lower contributions from all business segments while core net profit (excluding RM2m unrealised forex gains) fell by a sharper 20%.

Outlook. Looking ahead, we anticipate a stronger performance in the upcoming 4QFY24. This improvement is driven by increased utilisation rates in its RF segments, bolstered by its ability to enhance customer stickiness through innovative packaging solutions such as double-sided moulding and system-on-module technology, reinforcing its leadership in the local OSAT space. Additionally, INARI is making significant progress in its recent business ventures, including power module packages, memory chips, optical transceivers, and its new 500k sq ft factory in Yiwu, China. Many of these products are currently in advanced qualification and sampling stages and are poised to positively impact subsequent quarters as production ramps up.

Forecasts. We cut our FY24-25F net profit forecasts by 5% and 2%, respectively.

Valuations. Consequently, we tweak our TP down by 1% to RM4.00 (from RM4.05) 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 case. We like INARI for: (i) direct proxy to 5G adoption, (ii) highly responsive to the market demand with the roll-out of new technologies such as double-sided moulding (DSM) and system-on-module (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 - 24 May 2024