We gathered that the weaker RF segment YoY was due to distortion in RF assembly volume as Customer B optimises its RF portfolio by phasing out lower-value discrete and mid-band products while shifting its focus towards premium high-band modules.
We expect a moderate improvement in 2QFY26, supported by additional testers consigned by Customer B to catch up with the stronger-than-expected orders from its end-customer.
Slashed our FY26/27/28F forecasts by 20%/17%/17% after accounting for lower loading assumptions for both its RF and optoelectronic segments.
Downgrade the stock to a HOLD rating (from Buy) with a lower target price of RM2.15 (from RM2.23), based on 5-year historical average PE multiple of 30x applied to rolled-over FY27F core EPS of 7.2 sen.
We came away from Inari’s 1QFY26 results briefing with the following takeaways:
Dip in assembly volume a drag to 1QFY26. Despite stronger smartphone sales YoY from its end-customer’s latest handset line-up, Inari’s 1QFY26 core earnings dipped 27% YoY due to an unexpected decline in RF shipments. We gathered from management that the weaker RF segment was due to distortion in RF assembly volume as Customer B optimises its RF portfolio by phasing out lower-value discrete and mid-band products while shifting its focus towards premium high-band modules. Consequently, RF assembly utilisation remained flattish at c.65% QoQ despite entering a seasonally stronger period.
A potentially better 2QFY26. Notwithstanding the assembly lull, testing utilisation stood above 80% as Inari commands full testing allocation from Customer B (vs only one-third for assembly). Hence, the stronger demand for premium modules, which are mainly assembled by its Taiwanese peer and ultimately sent to Inari for testing, has partly cushioned the weaker assembly loadings. We expect a moderate improvement in 2QFY26, supported by additional testers consigned by Customer B to catch up with the stronger-than-expected orders from its end customer.
Uncertainties persist but not all gloomy. The revenue loss from mid-band RF assembly could be mitigated by potential gains in premium module assembly for next generation handset in FY27F. We understand Inari is working with Customer B to capture a portion of premium product assembly currently handled by its Taiwanese peer, which is facing capacity constraints due to surging demand for advanced packaging for AI applications, though the quantum remains uncertain at this juncture. Additionally, the Skyworks-Qorvo merger may prompt Customer B to maintain its discrete and mid-band modules at the request of end customer in light of its dual-sourcing business continuity strategy, thereby potentially helping to recover Inari’s RF assembly business in FY27F, in our view.
Memory: A long-term strategic play. Inari’s memory business continued to record minor losses in 1QFY26 no thanks to die shortage from Customer S, keeping its loading volume suboptimal at 10-15k dies/day (capacity catered for 60k/day). Its throughput is expected to improve as Customer S has committed a volume of 30k dies/day going forward. While revenue contribution remains immaterial, management reiterated its optimism on Inari’s entry into back-end memory assembly as the only strategic partner of Customer S in Malaysia. Although Inari currently focuses on low-end memory assembly, it stands to benefit from potential spillover via the customer’s continued outsourcing strategy as it reserves capacity for higher-value products amid the prevailing memory supercycle and the development of HBF technology.
Forecast. We slashed our FY26/27/28F forecasts by 20%/17%/17% after accounting for lower loading assumptions for both its RF (accounting for the loss of discrete and mid-band assembly business) and optoelectronic segments (slower-than-expected revenue growth).
Valuation. Post-adjustments, we downgrade the stock to a HOLD rating (from BUY) with a lower target price of RM2.15 (from RM2.23), based on 5-year historical average PE multiple of 30x applied to rolled-over FY27F core EPS of 7.2 sen, with a 0% ESG premium/discount, reflecting its three-star ESG rating. We turn cautious on the stock given the lack of near-term earnings catalysts from its core RF business, with meaningful uplift likely only in the next smartphone upcycle in FY27F, driven by potential RF share gains from its competitor. Nonetheless, the joint acquisition of Lumileds with Sanan and the successful execution of its turnaround and insourcing strategy could serve as rerating catalysts. Management guided that the deal is expected to be completed by 1HCY26, barring unforeseen circumstances.
Risk. Delays in its turnaround plan for Lumileds, steep depreciation of USD against MYR, and US semiconductor tariff uncertainties.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.116228 | 4.149111 |
| EUR | 4.800323 | 4.805223 |
| CNY | 0.584269 | 0.584863 |
| HKD | 0.528729 | 0.532442 |
| SGD | 3.178741 | 3.201165 |