• Maintain BUY and MYR3.62 TP, 25% upside, c.3% FY24F (Jun) yield. We believe Inari Amertron will show sustainable performance going into 2QFY24 with potential QoQ margin improvement on the back of healthy loadings and efficiency management. Various new projects are progressing according to plan, with new packaging technology and budgeted capex on new plant expansions earmarked for future growth. We like the stock for its relatively stickier earnings profile, solid execution, and various yielding diversification strategies.

• Results recap. 1QFY24 revenue of MYR383.9m (+28.5% QoQ, +1.8% YoY) and core earnings of MYR85.8m (+32% QoQ, -14.6% YoY) were broadly within expectations. Demand for premium products is relatively sticky with steady loading and increasing content. However, earnings were undermined by margin compression due to additional input costs (electricity, staff, new machinery) and one-off electricity outage. A first interim DPS of 2.2 sen was declared.

• Outlook. Management is guiding for stable loading into 2QFY24 with utilisation of above 90% for radio frequency (RF) to make up for some volume loss in 1QFY24. Additional content growth for the new model of flagship smartphones would help sustain revenue for its RF segment. Its optoelectronic segment is seeing a pick-up in volume loading as well as stabilising yield and production for some of the new packages/products in sensors and optocouplers. On the generic side, demand is expected to be flattish to stable.

• New project updates. The memory products’ production line using stacked die technology is now progressing into four lines and should increase to eight lines in six months, with meaningful revenue contribution in 2HFY24F. Meanwhile, the high-power LED products are progressing well at various stages in mass production, testing, engineering build, and qualification in the Penang and Philippines plants. The optical transceivers products are seeing strong demand from customers due to the emergence of artificial intelligence (AI). One product from the System on Module for power management in the industrial application is currently in mass production while a few other modules are undergoing qualifications.

• Expansion plans. The new Fab 1 factory in China under the Yiwu Semiconductor International Corporation (YSIC) JV is progressing as planned, with one product under the SiP platform currently undergoing the qualification stage. Low volume production is expected to start in 3QFY24F. Capacity expansions at Clark, Philippines and at P34, Penang are ongoing with a capex of MYR236m for FY24F-25F earmarked for future growth.

• Maintain our forecasts and MYR3.62 TP based on an unchanged 31x CY24F P/E (+1.5SD from the 5-year mean) and a 2% ESG premium. Key downside risks: Weaker-than-expected 5G smartphone orders, nonrenewal of contracts, and unfavourable FX movement.

Source: RHB Securities Research - 24 Nov 2023