Investment Highlights

• We maintain our BUY call on Inari Amertron (Inari) and fair value (FV) of RM3.72/share, pegged to an unchanged forward CY23F PE of 25x. We continue to ascribe a 4-star ESG rating, which translates to a 3% premium to Inari’s FV (Exhibit 4).

• Our forecasts are maintained following Inari’s investors briefing. Here are the key takeaways:
  • Inari’s 4QFY22 effective tax rate increased by 8% points QoQ to 20%, primarily due to additional deferred tax charges of RM12mil from the recognition of capital allowance. Stripping this, the group normalised effective tax rate for 4QFY22 was 9%, in line with the group’s 3-year average of 8%.
  • The smartphone segment, which contributed 63% of the group’s FY22 revenue, is guided to be flattish YoY for FY23. This is in line with expectations of slowing smartphone demand, which we have imputed into our forecasts.
  • Meanwhile, we expect the optical communication segment (13% of FY22 group revenue) to grow by 30% in FY23 as the group is in the final stage of offering turnkey services to its key customers.
  • On the other hand, the automotive segment is gradually ramping up, with 2 additional power system-on-module (SOM) lines in the group’s P34 plant. While material constraints continue to be a key issue, we remain optimistic on this segment’s longer term outlook, and favourably view the group’s diversification effort into this division.
  • In terms of the ongoing labour shortage that is affecting Malaysia’s E&E sector, Inari’s risk has been substantively mitigated by its early investment in automation, which removes the need for manual processes in production. However, shortage of skilled workers such as engineers remains a persistent headwind faced by the industry.
  • Despite having a strong customer base in the US, management has no intention of setting up strategic partnerships for US expansion to take advantage of the US$53bil subsidies under the US CHIP Act, given that higher operating costs in the country could negate any value accretion. The group remains committed to Southeast Asian expansions to better extract synergistic values for its customers.
• We remain upbeat on Inari’s fundamentals and outlook. The group’s long-term prospects stem from:
  (i) the resilience of its radio frequency (RF) earnings and margin due to higher chip complexity in 5G devices and its applications;
  (ii) strong net cash position of RM2bil as at June 2022, which translates to 18% of its market cap; and
  (iii) its plans to enhance and diversify revenue streams via joint ventures in outsourced semiconductor assembly and test manufacturing operations in China.

Source: AmInvest Research - 23 Aug 2022