DEVELOPMENT & VIEW

• Staying relevant with time-to-market concept. We are maintaining our NEUTRAL recommendation for Inari with an unchanged target price of RM3.25 post the briefing session on 4QFY24 results. The RF business will remain the group's core business, making up around 60% of the total revenue. There is also active effort, since the pandemic, to reduce the dependency on RF business to around 50%. However, we view that in the foreseeable term, RF contribution to the group will stay around current level. To sustainably grow the business, Inari's profit margin has taken a hit as seen in FY24 financial performances. We view that this should persist in the foreseeable term until better volume loading is observed. The effort to grow the business can also be seen in the capex and R&D commitment.
• Short-term sacrifice on margin for growth. To recall, Inari's 4QFY24 normalised earnings improved by +22.1%yoy to RM59.5m premised on higher loading volume in RF and optoelectronics business segments. On a cumulative basis, FY24 normalised earnings contracted marginally by -1.9%yoy to RM302.1m, led by the contraction in profit margin. This was mainly due higher electricity cost as well as new product offering which garner lower margin in the initial stage. Management guided the future profit margin to be between 20% to 25% in the foreseeable term. On this note, we view that profit margin will stay at the lower range in the near-term.
• RF business remains a heavyweight. FY24 revenue was up by +9.2%yoy to Rm1.5b. The RF business remains commendable, making up 61% of the total revenue. This translates into a +12.9%yoy increase in revenue to RM902.0m. Similarly, the optoelectronics business segment also posted an increase of +9.2%yoy to RM488.0m. This makes up one third of the group's revenue.
• Moving forward, we expect a similar proportion to be observed. There is a production ramp for RF on the upcoming launch of new AI-enabled flagship phone. We believe ASP should be favourable given the higher dense content chip. This is also supported by continuous process optimization, leading to better yield.
• For the non-RF business, there is also upbeat progress on: i) memory module, ii) higher power LED, iii) Edge AI package, iv) optoelectronics, v) power management and vi) sensors/optocouplers.
• Setting up the platform for future growth. For FY24, a total capex of RM181m was invested for new technology and/or new business wins. This is expected to be slightly lower at RM150m (-17.1%yoy). Meanwhile, R&D expenses totalled up to RM17m. Notably, management guided that more will be spent for FY25 at RM20m (+17.6%yoy). We believe the latter will be channeled to develop advanced packaging abilities as well as autonomous manufacturing.
• Employing alternative sources of electricity. To recall, in FY24, the group's operation has been affected by unstable glitches in electricity supply from the grid. This has led to some losses in work-in-progress items as well as lost in production time. To circumvent this issue, the group is actively expanding the application of solar in its factory. This would also help in its ESG effort. Moreover, it is also setting up a power plant to support the wafer processing business at a cost of RM10m.

Source: MIDF Research - 29 Aug 2024