• Maintain NEUTRAL and MYR3.60 TP (7% upside), c.3% FY25F (Jun) yield. FY24 core earnings of MYR306m (-4.4% YoY) were a slight miss, dragged by margin compression on additional input costs from expansions and new product development. At the current valuation, we believe Inari Amertron’s anticipated FY25 growth has been factored into the price and earnings growth projections, with potential downside in the event of any delays or execution risks. Hence, we prefer to accumulate at lower levels.

• Weighed down by margins. FY24 core earnings were slightly below expectations at 93.6% and 91.2% of our and Street’s full-year estimates due to weaker-than-expected margins. This was despite higher revenue of MYR1.48m (+9.2 YoY), which was supported by stronger volume loadings and favourable FX. RF products made up 61% of FY24 revenue, followed by optoelectronic products (33%), and legacy and generic integrated circuits (6%). However, EBITDA margin contracted to 25.3% (FY23: 30%) due to additional fixed costs from new hires and set up costs for new product development, coupled with glitches in electricity supply. A third interim DPS of 1.4 sen was declared (4QFY23: 2 sen), with the ex-date on 11 Sep.

• Sequentially weaker. We noticed the unusually weaker sequential loadings, which affected 4QFY24 revenue of MYR333.1m (-4.2% QoQ), while core profit of MYR58.9m (-17.6% QoQ) was further weighed down by unfavourable FX and a lower-margin product mix. This could be due to the delay in the ramp-up of the new smartphone range. YoY, core earnings were dragged down (-9.4%) by higher operating costs such as electricity and the early staging of new products.

• Outlook. Stronger demand for new US-based flagship phones expected in September/October with new AI features could be an upside risk to consensus’ 241m forecasted units in 2025 (from the 220-230m range in 2024). This, alongside new memory products, power management modules, optical transceivers and high-power LED products, Edge AI, and maiden contribution from its Yiwu venture point to a better FY25.

• Forecasts and TP. Our forecasts are unchanged other than a minor model- upkeeping exercise. We maintain our MYR3.60 TP based on an unchanged 31x P/E (+1.5SD from its 5-year mean). Note that a 2% ESG premium has been baked into our TP, as INRI’s ESG score of 3.1 is above the country median.

• Key risks are stronger/weaker-than-expected smartphone sales, favourable/ unfavourable FX movement, production yield, and cost pressures.

Source: RHB Research - 28 Aug 2024