This article first appeared in The Edge Malaysia Weekly on September 16, 2024 - September 22, 2024

The rising adoption of advanced technologies such as the Internet of Things (IoT), artificial intelligence (AI) and fifth generation (5G) has significantly increased demand for cutting-edge semiconductors.

Inari Amertron Bhd (KL:INARI), the country’s largest outsourced semiconductor assembly and test (OSAT) player, has strategically positioned itself to support this technological proliferation through its advanced engineering capabilities.

The one-stop turnkey services provider specialises in 5G Radio Frequency (RF) packages, fibre-optic transceivers for cloud-connected data centres, and power modules for automotive and industrial electronics.

Riding the semiconductor boom that started since the Covid-19 pandemic, Inari saw its net profit more than double from RM155.8 million in the financial year ended June 30, 2020 (FY2020) to RM330.5 million in FY2021. Its bottom line grew further to RM390.9 million in FY2022 before retracting to RM323.5 million in FY2023. The latter is still double the net profit in FY2020.

The strong earnings performance resulted in a risk-weighted three-year profit after tax (PAT) compound annual growth rate (CAGR) of 22.1% between FY2020 and FY2023, earning the group The Edge Billion Ringgit Club (BRC) award in 2024 for the highest profit after tax growth over three years for the technology sector. Inari last won the same award in 2018.

In 2022, Inari won The Edge BRC award for highest return to shareholders. In the period under review for the current year, however, shareholder return was only 3.5% per annum over three years as its adjusted share price went from RM2.91 on March 31, 2021, to RM3.23 on March 31, 2024.

Its return on equity (ROE), however, declined from 25.6% in FY2021 to 20.2% in FY2022, before dropping further to 12.7% in FY2023. Its adjusted weighted ROE over three years still stood at 17.5%.

Main Market-listed diversified group Insas Bhd — controlled by low-profile businessman Datuk Seri Thong Kok Khee — is Inari’s single-largest shareholder with a stake of about 13.64%.

In its Annual Report 2023, Inari’s non-independent, non-executive chairperson Tengku Puteri Seri Kemala Tengku Hajjah Aishah Almarhum Sultan Haji Ahmad Shah highlighted that throughout FY2023, the group had made significant capital investments, totalling RM113 million.

“These investments primarily went into machinery for assembly processes, enhancing our technological capabilities and overall capacity. As technology advances, our expertise in miniaturisation technology, driven by customised processes and equipment designed by our joint venture subsidiary, namely Inari MIT Sdn Bhd, has improved operational productivity while maintaining cost efficiency,” she said.

Additionally, Inari established the group’s first 1k clean room at its P34 plant in Batu Kawan, Penang to assemble memory products, leveraging cutting-edge technology for a new customer.

Meanwhile, Inari is making “good progress” on the construction of a manufacturing plant and physical facilities at its joint venture in China, Yiwu Semiconductor International Corp (YSIC), said Tengku Aishah.

“With an experienced management team on board, we have successfully secured interest from a few customers keenly awaiting qualification of their products on our production lines to commence operations. YSIC represents a strategic presence for Inari to broaden its competitive edge offerings to a wide China market,” she elaborated.

Looking ahead, said Tengku Aishah, Inari maintains cautious optimism for FY2024, as technological investments prioritise digitalisation as a broader trend.

“Our focus remains on strategies to enhance production capacity, efficiency and revenue growth, aligning with or surpassing industry forecasts in FY2024,” she added.

In a research report dated July 4, RHB Investment Bank Bhd said it expects subdued near-term earnings growth for Inari, with a brighter FY2025 driven by anticipated contributions from new products and expansion.

“Lacklustre volume growth in major smartphones amid intense competition and trade tensions suggests limited near-term earnings potential, especially if new customers or project contributions fall short of expectations,” the report noted, warning of operational headwinds.

Other potential risks include underperformance of the new major smartphone range with the hype built-in on embedded AI features but with few transformation changes to back it up.

“Besides this, the delays or lower contribution from its YSIC expansion in China (we factored in a RM150 million revenue contribution in FY2025), coupled with the slower-than-expected ramp-up and margins for new memory and optoelectronics could pose other downside risks to expectation, while Edge AI and solar-related ventures are still at infancy stage,” it added.

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