INARI's 1QFY25 core net profit of RM77m (excluding forex impact) was broadly in line with our expectations. Looking ahead, INARI is poised to benefit from forex gain, with its RF segment driving growth through higher utilization rates and innovative packaging solutions. The company is well-positioned to capitalise on the increasing demand for AI-powered smartphones and high-bandwidth opto-electronic devices. We are maintaining our forecast for now, pending updates from the upcoming briefing. The target price remains at RM4.05 with an unchanged OUTPERFORM rating.

INARI's 1QFY25 core net profit of RM77.4m (-10% YoY, after excluding the RM53.3m forex losses) came in largely within our expectations but below the consensus full-year estimate, accounting for 21% and 19% of the respective forecasts. It declared a dividend of 1.0 sen, down from 2.2 sen a year ago.

YoY, INARI's 1QFY25 revenue increased by 1%, driven by demand for its RF filters (which account for approximately 60% of the group's revenue) used in a US smartphone brand. However, its core net profit decreased by 10% due to a lower gross profit margin (21.5% vs. 24.1%), partly impacted by unfavorable forex, which led to higher material costs.

Notably, the group incurred RM53.3m in forex losses during the quarter, with 89% (RM47.2m) being unrealized losses, which are expected to unwind if the USD/MYR exchange rate normalizes at current levels.

QoQ, core net profit surged by 29%, supported by a 17% increase in revenue driven by higher loading volumes in the RF business segment, as the company entered the seasonally strong 1H period (Jun-Dec).

Outlook. Looking ahead, we anticipate a significant forex gain in the coming quarter, driven by the rapid recovery of the USD/MYR exchange rate. The Group's RF segment is expected to continue driving growth in FY25, supported by higher utilisation rates and strengthened customer loyalty through innovative packaging solutions such as double-sided moulding and system-on-module technology, reinforcing its leadership in the local OSAT space. Additionally, the Group is strategically positioned to capitalise on the roll-out of AI-powered smartphones and the growing demand for high-bandwidth opto-electronic devices used in networks and data centers, both of which are essential to support the expanding AI market.

Forecasts. We are maintaining our financial forecasts for now, awaiting further insights from today's results briefing.

Valuations. We maintain our TP at RM4.05 based on targeted CY25F PER of 35x. Our valuation reflects a 10% premium on peer's forward mean, justified by the company's superior net margins of >20% (vs. peers of single digit). Our TP imputes a 5% premium to reflect its 4-star ESG rating as appraised by us (see Page 4).

Investment case. We like INARI for: (i) being the closest proxy to 5G adoption, (ii) being highly responsive to the market demand with the roll-out of new technologies such as double-sided moulding (DSM) and system-on-module (SOM), and (iii) its significant expansion in China, capitalising on the superpower's aggressive push for semiconductor self-sufficiency. Maintain OUTPERFORM.

Risks to our call include: (i) a soft global smartphone market, (ii) new offerings not well-received by key customers, (iii) supply-chain disruptions, and (iv) delays in its expansion in China.

Result Highlight

Source: Kenanga Research - 28 Nov 2024