What Investors Need to Know Before Inari's Upcoming Earnings Report?

The company is scheduled to release its financial results for the first quarter of the FY2025 (ending 30th September, 2024) on 27th November.

Market expectations for INARI's financial performance are as follows:

● It is projected to achieve a revenue of RM475.5 million, representing a year-over-year increase of 23.85%.

● Consensus EPS is RM0.04, an increase of 54.19% compared to the same period in the previous year.

● However, the stock price has risen by more than 30% from the beginning of 2024 to mid-July, and has almost given back all the gains made since the beginning of the year since the end of July. The average price target for Inari is RM3.68, suggesting a potential increase of 26%.

In the first nine months of 2024, news of data center expansion in Malaysia has significantly driven the development of the construction and real estate industries. However, the stock performance of the technology sector has lagged significantly. This discrepancy is mainly due to the fact that current data center projects are still in the construction phase, which typically takes 12-18 months to complete. As the construction nears completion, starting from the decoration phase, the newly built data centers will begin to be equipped with server racks, power distribution units, cooling systems, and security measures. It is estimated that the completion of data center construction work will be around the end of 2024 to the first half of 2025. During this period, there will be a massive demand for data center-related hardware. Currently,15% of INARI's revenue comes from Datacom, and the faster deployment of AI in future data centers is expected to increase bandwidth demand, potentially accelerating the network cycle upgrade, thereby increasing this portion of the revenue.

Looking at the revenue distribution for 2023, 62% of INARI's income comes from smartphone-related businesses, which is highly correlated with iPhone shipments. Due to the delayed launch of AI features, the iPhone's fiscal year 25 shipments are expected to grow moderately, by approximately 1.9%. INARI is a major OSAT partner for Broadcom's radio frequency filter business, and Broadcom is a leading supplier of products for Apple's smartphones. Therefore, it is anticipated that INARI's Smartphone business will not have many growth highlights .

In the face of slowing growth in the smartphone market, INARI invested RM180 millionin FY24 and plans to invest an additional RM150 million in FY25 to expand production capacity and enhance technological capabilities. This represents a significant increase from the capital expenditure of RM118 million in FY23. The company is working on several new projects, including high-speed transceivers and flash memory projects, which are about to enter the mass production phase. Other projects include high-power LEDs, edge artificial intelligence, and power management modules.

The Yiwu factory was completed in February 2024 and has recently passed the certification process for four products, with one production line involving chip-scale packaging (CSP) and system-in-package (SiP), mainly targeting the smartphone-related sector. Small-scale production is expected to begin by the end of 2024. The company had previously planned to achieve an annual revenue of 1 billion RMB (equivalent to RM600 million ) by 2027. However, due to the severe outlook, the timeline for capacity expansion has been delayed, and there are currently no plans to expand beyond one production line.

According to Bloomberg, over the past two months, a total of 12 analysts have provided ratings, with 7 of them giving a "Buy" or "Outperform" recommendation. The highest target price was given by AFFIN Hwang on 7th November, with a target price of RM4.78, and the lowest was given by JPMorgan on October 16th, with a target price of RM2.8. JPMorgan believes that, as a major OSAT partner for Broadcom's radio frequency filter business and with Broadcom being a leading supplier to Apple/Samsung's smartphones, INARI faces limited subsequent iPhone RF content growth, coupled with flat iPhone shipments in the fiscal years of 2025/26, which provides limited reason to buy INARI. However, JPMorgan believes that the high net cash position equivalent to 20% of market capitalization and the current valuation of 29 times one-year forward P/E (24 times excluding cash) provides some downside protection. As one of the largest OSATs in Malaysia and ASEAN, INARI is also a strong contender for supply chain migration and should continue to attract active investor attention.