Results

• 1QFY16 sales of RM274.9m was translated into a core net profit of RM42.2m which came in within expectation, accounting for 24.4% of HLIB’s full year forecast but shy of street’s estimate by 11.2% when annualized.

• One off adjustments:
• 

Deviations

• In line.

Dividends

• Declared 1st single tier dividend of 2.3 sen (1QFY15: 1.8 sen) per share and a special dividend of 0.5 sen (1QFY15: 0.4 sen) per share, which go ex on 26 Nov.

Highlights

• Attributed the expansionary results solely to the favorable movement of USD against RM. For 1QFY16, the exchange rate averaged at RM4.04/USD, representing +10.6% qoq and +26.6% yoy.

• Although CY15 global semiconductor market growth has been cut by Gartner to 0.8% yoy decline due to weakening demand in several electronic equipment sectors including PC, smartphone market continues to show growth of circa 10%. Gartner believes that the industry will return to positive growth in CY16 with 1.9% yoy expansion.

• Inari will continue to integrate and improve the profitability of Optoelectronics business and continue to ride the growth of the mobile smart device market. The capacity expansion in P13 is on track and will drive growth in FY16.

• While the strong USD is a boon, it is seeing risks of customer price-down, wage inflation, loss of highly qualified technical staffs seeking better opportunity elsewhere and difficulty of attracting good foreign workers to Malaysia.

• Analyst briefing will be hosted this morning which we expect to grasp better understanding of the company outlook.

Forecasts

• Unchanged pending analyst briefing today.

Catalysts

• Wireless communications / mobility / IoT (M2M) / LTE.

• Business diversifications into optoelectronics and T&M.

• Favorable FOREX.

• Continuous effective operational strategy.

Risks

• Major client risk (Avago) / high dependency.
• FOREX risks.
• Patent disputes.
• Resources / labour shortage.

Rating

BUY , TP: RM3.79

Positives

• Appreciation of greenback, 40% dividend payout providing reasonable yield and strong earnings growth.

Negatives

• Innovation stalemate in telecommunication.

Valuation

• Reiterate BUY while TP is maintained at RM3.79 pending analyst briefing. TP is pegged to multiple of 15x of CY16 EPS, 7% premium to peers (see Figure #4) as Inari is a beneficiary of strong USD.

Source: Hong Leong Investment Bank Research - 13 Nov 2015