Following the analyst briefing, we remain upbeat on INARI’s outlook, underpinned by the healthy earnings contribution from the radio frequency (RF) segment. On top of that, we are excited about its latest ventures into AI-related products. Meanwhile, the group will continue working on new projects as part of its customer diversification efforts. On the other hand, the progress of the new plant in China remains intact. Overall, we maintain a Buy call on INARI with an unchanged target price of RM4.30.

Radio Frequency Segment Remains Resilient

To recap, INARI’s 9MFY24 core profit dropped 4.8% to RM243.1mn, although revenue was 8.6% higher at RM1,145.6mn. The revenue growth was mainly driven by higher loading volume in RF and optoelectronics business segments. However, the group saw a weaker bottom line due to higher electricity rates as well as losses arising from glitches in electricity supply. Based on management’s guidance, the electricity supply issues have been rectified accordingly. Going forward, management guided that the RF segment is expected to remain resilient, backed by higher content growth and higher testing time. In term of the sales breakdown, 3QFY24 remained led by RF at 60%. This was followed by optoelectronics at 34% and generic at 6%.

Looking Forward to Launching More New Products

Management revealed that the group has ventured into testing and packaging of AI-related products. Despite the earnings contributions to the group is relatively small at this juncture, management guided that the potential for AIrelated products could be huge due to its wide applications. The group is currently working with both a US and a Japanese customer on these new AIrelated services. Meanwhile, the group will continue to work on new projects as part of its customer diversification efforts. Management indicated that these new projects will remain focused on memory products, high-power LEDs, system on modules, and optical/sensor products. In term of CAPEX, INARI had invested a total of RM137.0mn for 9MFY24. The group intends to spend another RM30mn to RM40mn of CAPEX for upcoming quarter. Moving forward, the group is eying to move up the value chain by focusing on advanced packaging.

The Progress of China JV Remains Intact

To recap, INARI’s 54.5%-owned Yiwu Semiconductor International Corporation (YSIC) in China has completed the construction of a new plant. Management guided that the JV has passed the qualification for 4 products. The low-volume manufacturing for these products is expected to take place by June 2024. In the meantime, the JV intends to carry out the sample build for systemin-package and wafer level packaging in 2H2024. Subsequently, the JV plans to offer ball-grid array packaging in 2025 and beyond. Over a longer term, management believes that YSIC stands a good chance to capitalise on the strong growth of semiconductor industry in China, given that China is actively pushing for self-sufficiency on its semiconductor supply chain amid the persisting US-China trade tensions.

Impact

Maintain FY24 to FY26 Earnings Forecasts.

Valuation & Recommendation

No change to our target price of RM4.30, based on unchanged 33x CY25 earnings. Reiterate a Buy call on the stock.

Source: TA Research - 27 May 2024