Mounting macroeconomic headwinds coupled with China’s restrictive Covid-Zero approach, and potential demand softness for Apple’s iPhone range will likely subdue earnings for Inari’s RF division from 2023 onwards.
Maybank Investment Bank has trimmed Inari’s FY23/24 earnings estimates by 7%/2% and moderate its valuation peg to 26x FY24E PER, on the back of monetary tightening risks (hawkish Fed tone of higher rates for longer). Hence, Maybank IB has set a reduced target price (TP) of MYR3.62 (-13%). Nonetheless, the research house has retained its BUY rating based on undemanding valuations and dividend yield attraction. Inari remains our top M’sian OSAT pick.
Largest iPhone plant operating at reduced capacity
Apple, Inari’s key end-customer for its RF division (approximately 65% of group revenue contribution for FY22), announced yesterday that its largest assembly plant in Zhengzhou, China was operating at ‘significantly reduced capacity’ following the imposition of strict Covid-19 closed-loop measures to contain an outbreak at the facility/city last week. The curbs are expected to limit the plant’s output capacity by c.30% in November, further adding to demand weakness for its baseline (non-Pro) flagship models that have seen softer take-up despite encouraging pre-launch figures. It is estimated that Apple to assemble c.80-85m units (vs. 90m previously) of its flagship iPhone 14 model for CY22.
Supply chain woes and end-demand softness
The research house does not foresee this event affecting Inari’s immediate 2QFY23, but with order visibility of just 3 firm + 3 floating months, it potentially foresees a reduction in 2HFY23 utilisation rates, underpinned by the deterioration in Apple’s supply chain and iPhone end-demand. In relation to the latter, challenging macro conditions (rising interest rates, strengthening USD) and tepid base model take-up (currently accounts for c.35-40% of total sales vs. 50% projected) poses key downside risks to Inari’s FY23/24 forecasts.
Focusing on older generation RF volume ramp-up
Imputing for lower utilisation from 1H23 onwards, Maybank IB has cut Inari’s FY23/24 earnings estimates by 7%/2% but leave FY25 forecasts unchanged. Despite higher RF content/margins for the newer models, management has guided that its RF assembly and test ops are focusing on ramping-up volume for older-gen iPhone models (sales projection for this segment are largely unchanged at 130m units globally) as a means of mitigating the slowdown in Apple’s flagship iPhone model output/sales.
Risk Identified are sharp downturn in the global markets for electronics, especially smartphones, will affect the demand for components that Inari produces for its key clients (i.e. Broadcom and OSRAM); design-in and design-out of components related to Inari’s current production will also affect revenue and earnings; forex volatility, especially USD/MYR, will affect Inari’s earnings, as over two-thirds of its revenue and COGS are denominated in USD.
