INARI: Earnings Decline Amidst RF Headwinds, Analyst Upgrades to Hold on Future Prospects

A recent research report by TA Securities highlights a challenging first quarter for the company, with core net profit experiencing a significant year-on-year decline. Despite the near-term headwinds, particularly within its radio frequency (RF) segment, the investment bank sees a positive long-term outlook driven by strategic initiatives and emerging technologies. Consequently, TA Securities has upgraded its recommendation for the stock from “Sell” to “Hold,” albeit with a revised target price.

Performance Review

For the first quarter of FY26 (1QFY26), the company recorded a core net profit of RM55.1 million, representing a 28.8% year-on-year contraction. Revenue for the period also saw an 8.6% dip to RM1,351.9 million. This weaker-than-expected earnings performance was largely attributed to reduced loadings across all business segments. The core RF segment, a key contributor to revenue, saw a 21.2% year-on-year contraction to RM198.7 million. This downturn was primarily due to lower loadings for discrete and mid-band assembly, stemming from a shift in a key customer’s product mix focus. The utilization rate for the RF division remained broadly stable quarter-on-quarter at approximately 65%.

Future Outlook and Strategic Initiatives

Despite the current softness, management maintains an optimistic view on the RF segment’s long-term prospects. This optimism is underpinned by the anticipated smartphone replacement cycle, which is expected to be significantly boosted by the accelerating adoption of Artificial Intelligence (AI)-enabled devices. Precedence Research projects the global smartphone market to nearly double from USD566.1 billion in 2024 to USD1,138.8 billion by 2034, reflecting an 8% CAGR.

The company is also actively pursuing new product development to diversify its revenue streams. In the datacom photonics segment, the outlook remains positive, supported by the recent expansion of chip fab assembly capacity to accommodate expected volume ramp-ups. For power management, several products have entered low-volume manufacturing, with progress towards qualifying additional US-based programs. The memory segment is transitioning to become a single-source supplier for its US customer, with further new product introductions underway. Furthermore, increased activity levels are anticipated in the coming quarters for testing services related to both automotive and edge AI products.

The proposed acquisition of Lumileds Holding B.V. is proceeding as planned, with completion targeted by the end of 3QFY26. Management views this deal as a significant opportunity for value creation.

Valuation and Recommendation

Following a revision of earnings forecasts to account for lower loadings in the RF segment, TA Securities has adjusted its target price to RM2.32, down from the previous RM2.48. This revised target price is based on 28x CY26 earnings, incorporating a 3% ESG premium. Reflecting a more balanced risk-reward profile after recent share price weakness, TA Securities has upgraded its recommendation from “Sell” to “Hold.”