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Author: kltrader   |   Latest post: Mon, 18 Feb 2019, 09:14 AM

 

MQ Research Maintains Outperform on Inari

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With the overwhelming amount of news flow on technology stocks at the start of the year, Macquarie Equities Research (MQ Research) released a report on Inari Amertron (INRI), following the cut on Apple’s sales guidance, on 4 Jan. MQ Research highlighted the impact of iPhones volume shrinkage on INRI’s earnings per share (EPS) expectations. MQ Research also lowered their FY20 sector price to earnings ratio (PER) to 16 times from a 5-year mean of 21 times.

Conclusion

  • Apple’s guidance cut implies a 15% year-on-year fall in Apple iPhone revenue. MQ Research is forecasting 6.6%/10.6% declines in iPhone shipments for CY18/19.

Impact

  • The Target Price (TP) cut: MQ Research expects further earnings cuts in 2019 that will be followed by multiple de-rating, in line with their sectoral view. CY19 will be a challenging year for smartphone shipments as it precedes the 5G product cycle that should begin in FY20. Following MQ Research’s previous earnings per share (EPS) cut, they trim EPS by another 3%/4% for FY19/20 and cut price to earnings ratio (PER) down to the 5-year average of 16x for TP of RM1.50.
  • But still outperform: MQ Research maintains their positive long term view on INRI, a highly integrated OSAT partner for Broadcom – one of three key RF FEM makers dominating high-band RF filters. INRI is ideally positioned to tap the 2x to 4x RF-filter potential of 5G smartphones. This is likely a FY21 story, but MQ Research sees diversification to Osram bridging the transition. While this does not minimise exposure to consumer electronics, it will be coming from near-zero base.
  • Outstanding concerns: 1) Margin compression – MQ Research assumed lower margins on lower asset utilisation (assume ~55-60% for FY19 vs ~65-70% for FY18); INRI will be able to offset some of the impact by redeploying resources to new products (Osram) and lower bonus payouts. 2) Further smartphone deceleration – INRI has minimal visibility on orders over the next six months and a deeper deceleration will trigger another bout of EPS/PER cuts. 3) Osram speedbumps – management highlighted that yields must be improved ~10% to meet customer requirements for new products; deadline: mid-late Jan.

Earnings and Target Price Revision

  • MQ Research cuts EPS by 3%/4% for FY19/20, which is -5%/-14% vs consensus.

Price Catalyst

  • 12-month price target: RM1.50 based on a PER methodology (16x FY20 PER)
  • Catalyst: Ramp-up for Osram, on-boarding of new customers.

Action and Recommendation

  • Maintain Outperform. MQ Research highlights INRI’s healthy RM525mil. net cash balance sheet, substantial buffer for the cyclical downturn and implied dividend yield of 4.2%. MQ Research’s bear case valuation of RM1.35 assumes EPS cut to zero FY20 growth.

Source: Macquarie Research - 16 Jan 2019

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Labels: INARI

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