• Inari’s 3Q18 core earnings rose 20.6% yoy to RM59.3m on the back of higher demand.

• Overall, Inari’s 3Q18 core earnings were ahead of ours but inline with consensus estimates at 83.4% and 74.5% respectively. No change to our estimates as we expect earnings to moderate owing to lower smartphone sales and stronger ringgit in 1QCY18.

• Declared 3rd interim dividend of 1.6 sen (YTD: 6.4 sen). This implies a dividend yield of 0.7% at current level.

• Downgrade to HOLD with a TP of RM2.17. At our TP, the stock implies FY18F PE of 27x before easing to 22x in FY19F.

Earnings improve 20.6% yoy

Inari’s 3Q18 core earnings grew 20.6% yoy to RM59.3m while 9M18 core earnings improved 29.4% to RM1.1bn. The growth was in tandem with higher revenue recorded following higher demand for product RF testing and optoelectronics. Overall, 3Q18 core earnings were above ours but inline with consensus estimates at 83.4% and 74.5% respectively.

Lower qoq earnings

On qoq basis, 3Q18’s earnings fell 19.1% on lower production and unfavourable forex. Qoq earnings weakened on lower sales to Singapore segment (-20% qoq and represents c.71% of total sales). We believe this could be due to lower smartphone sales in 3Q18.

No change to our estimates

We make no changes to our estimates as we expect smartphone sales to moderate and ringgit to strengthen in 4Q18. Similarly, the management guided that the US’s moves against ZTE Corporate of China is affecting some orders from optoelectronics segment during 4Q18.

Downgrade to HOLD at RM2.17 TP

We downgrade our call on the stock to HOLD with a TP of RM2.17 (WACC: 8.6%, long-term growth rate: 5%) following its strong share price performance which have risen by 14.9% since we initiated coverage in Apr 2018. We are cautiously optimistic on Inari’s outlook owing to unfavourable forex which may offset gains from robust demand. The uncertainties from US-China trade negotiations could also pose a threat to the sector.

Source: BIMB Securities Research - 23 May 2018