How to Interpret Inari Amertron Bhd's Q2 Earnings Report?

Inari Amertron Bhd experienced a decrease in its net profit during the second quarter ending on December 31, 2023. The company reported a 7.26% year-on-year (YoY) drop to MYR86.81 million ($21 million), down from MYR93.61 million in the corresponding period the previous year. This decline was primarily attributed to escalated set-up costs associated with new product development and increased electricity expenses, outweighing the positive impact of revenue growth.

Despite this decline in net profit, Inari Amertron Bhd registered a 2.89% YoY increase in revenue for Q2 FY2024, reaching MYR414.08 million compared to MYR402.46 million in the prior-year period. This rise was mainly driven by robust loading volumes in both the radio frequency and optoelectronics segments.

Looking at the first half of FY2024, the trend continued as the company's net profit slid by 14.05%, falling to MYR171.79 million from MYR199.86 million a year earlier. Concurrently, revenue saw a modest 2.38% uplift, rising to MYR798 million from MYR779.46 million over the same comparative period, primarily buoyed by sustained growth in the RF segment.

Revenue Boosters: Data reveals that the Group's revenue growth, both on a quarterly YoY basis (an increase of 2.9%) and sequentially (a jump of 7.9%), is largely credited to a relatively higher loading volume in the RF and optoelectronics business segments. Concretely, this translates into moving from RM402.5 million in the same quarter last year to RM414.1 million in the current quarter, and from RM383.9 million in the immediately preceding quarter to RM414.1 million.

Cost and Expense Challenges: The Group's profit after tax in the current quarter declined by 7% from RM93.1 million in the corresponding quarter of the previous financial year to RM86.6 million, primarily due to increased setup costs for new products and higher electricity tariffs. Specifically, the hike in electricity costs directly affected operating expenses, leading to reduced net profits.

Foreign Exchange Volatility: Between the current and the immediately preceding quarter, although revenue grew, the net profit increased marginally by only 1.5%, from RM85.3 million to RM86.6 million, due to unfavorable movements in foreign exchange rates. On a half-year comparison against the corresponding period of the previous financial year, such fluctuations had a pronounced impact, resulting in a 13.8% decline in net profit, from RM199.5 million to RM171.9 million.

Non-operational Costs and Unexpected Losses: Throughout the six months ending 31 December 2023, the Group faced some non-recurring costs, including losses on work-in-progress items due to temporary instability in electricity supply from the grid, which has since been rectified. These issues temporarily eroded profits during the period, negatively impacting overall profitability.

Gross Margin Dynamics: In pursuit of revenue growth, particularly when launching new products, the Group experienced a short-term dip in gross margins. This strategy, which involved temporarily accepting lower margins on new products to gain market share, partially offset the benefits of revenue growth, exerting downward pressure on overall net profits during the period under review.

Throughout the six months ending 31 December 2023, the Group faced some non-recurring costs, including losses on work-in-progress items due to temporary instability in electricity supply from the grid, which has since been rectified. These issues temporarily eroded profits during the period, negatively impacting overall profitability.

Throughout the financial period that concluded on 31 December 2023, Inari Amertron Bhd executed two interim single-tier dividend distributions about the financial year ending on 30 June 2023. Specifically, on 7th July 2023, a third interim dividend of 1.40 sen per ordinary share was paid out, accumulating to a total sum of RM52.3 million. Following this, on 6th October 2023, a fourth interim dividend payout took place, offering shareholders 2.00 sen per ordinary share, which altogether accounted for RM74.8 million.

Thus, within the period under review, the company completed its dividend disbursements for FY2023, encompassing both a MYR52.3 million tranche and a larger MYR74.8 million tranche, respectively.

During the six months up to 31 December 2023, the Company's issued and paid-up ordinary share capital surged from RM2,033,397,743 to RM2,070,712,653 due to the issuance of 14,232,500 new shares via the ESOS 2022 scheme at varied exercise prices. The new shares carry equal rights to existing ones and could dilute EPS if earnings remain constant.

During the six months ending 31 December 2023, Inari Amertron Bhd augmented its issued and fully paid ordinary share capital from RM2,033,397,743 to RM2,070,712,653 through the issuance of 14,232,500 new ordinary shares under its Employee Share Option Scheme 2022 (ESOS 2022). The new shares were issued at differing exercise prices and possess identical rights to the company's pre-existing shares. This increase in share count could lead to EPS dilution if net income growth doesn't match the rise in shares outstanding.

Regarding the impact of the ESOS exercise, it is essential to consider Inari Amertron Bhd's financial performance during the reporting period. An offsetting increase in earnings could mitigate the dilutive effect on EPS; however, absent significant earnings growth, EPS dilution would occur. Apart from this ESOS issuance, there were no other changes to the company's capital structure, including debt/equity transactions, share buybacks, cancellations, treasury shares, or resale activities.

The company projects cautious optimism about its future profitability in the semiconductor sector, with WSTS forecasting a 13.1% global semiconductor market growth in 2024 and IDC expecting a 20% annual recovery, driven by smartphone demand recovery and strong AI chip demand. In response to these favorable trends, the group is actively pursuing new opportunities within Malaysia's OSAT ecosystem, aiming to increase revenues while enhancing production capacity and operational efficiency.

Notably, the Group hasn't issued any profit forecasts or guarantees. Therefore, the outlook balances optimism with caution, recognizing potential growth opportunities but considering the unpredictability without official profit projections.