INARI's 1QFY25 briefing reassured us of its stable outlook, supported by steady RF segment contributions (66% of revenue) and growth in optoelectronics demand from AI data centers. The memory module under P34 is set to add RM100m in FY25, driven by scaled production.

The RM100m annual investment in advanced packaging and wafer- level processes highlights its innovation focus. While YSIC JV faces slower growth, efforts to qualify new products continue. We lower FY25/FY26 profit forecasts by 6%/4%, reduce our TP by 5% to RM3.85, reflecting a 10% premium on peers. Maintain OUTPERFORM.

We came away from INARI's 1QFY25 briefing reassured of its outlook with the following key takeaways:

1. INARI's RF segment, contributing approximately 66% to its 1QFY25 turnover, is expected to remain stable, supported by sustainable volume loadings. Growth drivers include the ongoing demand for new- generation smartphones and the anticipated launch of a low-cost model by a prominent brand in March 2025. Meanwhile, its opto-electronics segment, which accounts for around 28% of its revenue, is projected to benefit from the increasing adoption of optical connectivity in AI data centers. INARI is well-positioned in this space through its exposure to fibre optic transceivers, optical modules, and programmable switches. Furthermore, its memory module under the P34 initiative continues to gain traction, earning customer recognition for a customised process that nearly doubles output. Contributions from this segment are expected to begin in early FY25, with an initial production capacity of 30k and scaling up to 60k units/day. The segment is targeting RM100m in revenue for the year.
2. INARI has earmarked an annual budget of RM100m to expand its production capacity and enhance product capabilities. This initiative aims to keep pace with rapid technological advancements and accelerate time-to-market development. The establishment of the New Technology and Development (NTD) team underscores the group's commitment to innovation. Recent accomplishments include the completion of advanced packaging systems such as System in Package (Type 1), Memory Stack (Type 2), and System on Module (Type 5). Ongoing projects aim to enhance advanced packaging (Type 4, including 2.5D interposer and 3D interposer) and single/multi-die flip chip packaging with thermal enhancements (Type 3). Plans are also in place to optimise wafer-level packaging processes (Type 6), further solidifying INARI's competitive edge.
3. Its 54.5%-owned YSIC JV, which operates a 500k sq. ft. facility in Yiwu, China specialising in Chip Scale Packaging, Wafer Level Packaging, and SiP assembly and testing, is facing slower expansion due to subdued market demand. However, the JV remains focused on working with design groups to qualify additional products, ensuring readiness for future market opportunities.
4. Forecasts. We have revised our FY25/FY26 net profit forecasts lower by 6%/4%, respectively, post reducing our turnover and margin assumptions as well as incorporating 1QFY25 results. Stripping off the forex loss, its 1QFY25's EBITDA margin stood at 29.1% compared to 31.1% a year ago.

Valuations. Correspondingly, we have lowered our TP to RM3.85 (from RM4.05 previously) based on an unchanged 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.

Source: Kenanga Research - 29 Nov 2024