We remain optimistic about INARI’s growth prospects with catalysts from: i) the 5G theme via its core radio frequency segment, ii) traction with customer diversification efforts, iii) progress with its China joint venture, and iv) above-industry average profitability. In all, we reiterate our Buy recommendation on INARI with an unchanged TP of RM3.55 based on a PE multiple of 33.0x CY24F EPS, which is ~+1.0SD to the stock’s 5-year mean.

RF Segment’s Growth Prospects Intact

We remain sanguine on the long-term growth prospects of INARI’s core radio frequency (RF) segment. From FY21 to FY23, the RF segment accounted for 59% to 60% of the group’s revenue. Going forward, we expect INARI’s RF segment to continue benefitting from 2 key factors, namely: i) the higher RF content demanded per smartphone – to support a broader range of frequency bands, and ii) the ongoing 5G smartphone upgrade cycle – with the proportion of 5G smartphone shipments worldwide forecasted to climb from 61% in 2023 to 83% by 2027. More recently, the RF segment’s utilisation rate was guided to have improved from ~80% in 1QFY24 (3QCY23) to >90% in 2QFY24 (4QCY23) as INARI overcame the temporary setback to production yield from unexpected power disruption. As such, we project INARI’s 2QFY24 earnings to be sequentially stronger within the range of RM101mn to RM105mn (versus 1QFY24’s of RM86mn).

Traction With New Projects & Customer Diversification Efforts

Supported by the trade diversion theme, INARI has continued to see traction with new projects as part of its customer diversification efforts. In FY24F, the revenue contribution from new projects was guided at ~RM150mn (~10% of our revenue forecast), anchored by memory and optic transceiver products. Among others, a key catalyst for these products includes emerging artificial intelligence platforms that demand more memory and optic transceiver products to power data centres. Other ongoing new projects include high-power LED (for billboard, stage lighting, curing, horticulture, etc.) and system on module (power management module for high power server and industrial application). Meanwhile, INARI also remains in talks with 4 strategic customers with products relating to electric vehicle charging, smartwatches, advanced optical inspection, and power management modules for data centres.

Progress With China JV

Shortly after the completion of its new plant in Yiwu, China, at the end of end- 2023, INARI’s 54.5%-owned Yiwu Semiconductor International Corporation (YSIC) kickstarted operations with maiden contributions from a new customer with products relating to smartphone application. Looking ahead, backed by its Chinese partner, China Fortune-Tech Capital Co Ltd (CFTC), we expect YSIC to benefit from ongoing efforts by Chinese semiconductor players to accelerate the localisation of their supply chain amid US-China trade tensions. To recap, the joint venture between INARI and CFTC is intended to focus on carrying out outsourced semiconductor assembly and test manufacturing and related businesses in China and for the Chinese market. Within 5 years, YSIC has set its sights on achieving revenue of RMB1.0bn and listing status.

Impact

We Maintain Our Earnings Estimates.

Valuation & Recommendation

In all, we reiterate our Buy recommendation on Inari with an unchanged TP of RM3.55 based on a PE multiple of 33.0x CY24F EPS, which is ~+1.0SD to the stock’s 5-year mean. We like Inari for its growth prospects with catalysts from the 5G theme, traction with customer diversification efforts, and aboveindustry average profitability.

Key downside risks include geopolitical tensions weighing on economic growth and disrupting supply chains, weakening of the USD against the Ringgit, surge in commodity prices, and material shortages.

Source: TA Research - 3 Jan 2024