• 3QFY19 core earnings slumped 29% yoy to RM42.4m due to lower volume loading for a key customer in Singapore, higher sales of low-margin products and higher depreciation.

• Qoq, core earnings fell 27% on lower sales from sensor product. EBITDA margin contracted 280bps to 25.5% due to higher sales of low-margin products.

• Overall, 9MFY19 core earnings were inline with ours and trailed consensus’s estimate at 81% and 69% respectively.

• Declared 1sen dividend (YTD: 4.1sen), implying an 85% payout.

• Downgrade to TRADING SELL (from HOLD) with a RM1.45 TP which values the stock at 24x FY19F PE. We expect further downside to earnings given tough outlook for RF testing as well as uncertainties from US-China trade tension.

Lower sales from key customer

3QFY19 core earnings slumped 29% yoy to RM42.4m due to lower volume loading from sensor and RF testing products; volume loading for key customer in Singapore (represents c.65-70% of revenue), fell 28%. Earnings were further dragged by higher sales of low-margin product and higher depreciation recognised during the quarter. Overall, 9MFY19 core earnings were inline with ours and trailed consensus’ estimates at 81% and 69% respectively.

EBITDA margin contracted

On qoq, 3QFY19 core earnings fell 27% on lower volume loadings from sensor product and higher sales of low-margin products. This resulted in EBITDA margin contracting 280bps to 25.5%.

Outlook remains negative

9MFY19 core earnings fell 25% in tandem with 18% revenue decline mainly due to lower volume loadings and higher sales of low-margin products. We expect earnings to remain tepid in 4QFY19 for its RF testing and sensor businesses following the restriction for a US based company to supply software and hardware to Huawei. This has resulted in Inari’s key customer halting supplies of networking products to Huawei and could lead to lower volume loading in coming quarters for Inari.

TRADING SELL at TP of RM1.45

We downgrade our call to TRADING SELL from HOLD with a TP of RM1.45 (WACC: 9%, g: 5%). This implies an FY19/20F PE of 24x/23x. The price has fallen 18% since 2QFY19 results release (in end/mid Feb 2019). However, we see further downside to share price following recent restriction on US-based companies supplying software and hardware to Huawei to reflect earnings risk for Inari's RF-testing business.

Source: BIMB Securities Research - 24 May 2019