• Still NEUTRAL, new MYR3.06 TP from MYR3.60, 5% upside, c.3% yield. Inari Amertron is set to be negatively impacted by the stronger MYR given its USD- denominated revenue. Despite initial uninspiring smartphone sales, it stays optimistic on its radio frequency (RF) unit fuelling FY25 (Jun) growth with rises in content, and higher loadings and new projects from optoelectronics. Share price has corrected in line with the slower new phones reception and FX tailwind, but we believe current valuations vis-à-vis FY25F (Jun) prospects are fairly priced in, with more growth catalysts set to kick in FY26.

• FX impact. The majority of INRI’s revenue (>90%) is denominated in USD, but it will be partially hedged by its USD purchases, which typically make up 40- 50% of COGS. A 1% FX depreciation could result in 1-2% impact to bottomline, ceteris paribus. However, loadings and yields remain the primary earnings drivers. Management indicates that margins compression, stemming from the negative FX movements, can be passed on to customers through revised quotations periodically, and engineering and process efficiency. We factored in the stronger MYR/USD to be in line with our in-house FX assumption to 4.10, 4.20, and 4.20 from 4.30, 4.20, and 4.20, resulting in FY25F-FY27F earnings cut by 14%, 11%, and 12%. Note: We also tweaked our cost assumptions on efficiency gains through process improvements, and lower our forecast for INRI’s China venture. Our TP is now lowered to MYR3.06 (inclusive of a 2% ESG premium), based on an unchanged 31x FY25F P/E at +1.5SD from its 5-year mean.

• Outlook. Management guided on softer-than-expected volume loadings for the new premium smartphone range, but sees potential upside from the staggered release of nascent AI features and new budget phone range to be launched in 1HCY25. However, content growth in the range of c.15% is expected for the new RF components. The optoelectronic segment should see more traction towards 2HFY25 with fibre optics and power LED products to contribute more significantly – there is a target to double revenue by FY26.

• On the Yiwu-JV, the China plant is running with small volumes with only one customer qualified so far. Management expects high volume manufacturing to begin in CY25, with volume commitment after certain changes in engineering processes are implemented. The short-term target for the plant is to hit CNY100m revenue once mass production commences. The target is to have a diversified portfolio and 4-5 customers over time. Potential M&A could be another upside risk, with the strong cash pile of MYR2.2bn sitting in the books. Separately, management also guided on the impact of a minimum wage hike to MYR2k will be at c.3-4% of FY25F earnings.

• Downside/upside risks to our call include slower-/stronger-than-expected orders and yields, and unfavourable/favourable FX movements. Non-renewal of contracts and technology obsolescence are also downside risks.

Source: RHB Research - 9 Oct 2024