Results

• 1HFY16 sales of RM568.6m was translated into a core net profit of RM83.6m which came in below expectations, accounting for 43.8% and 41.7% of HLIB and street’s full year forecast, respectively.

• One off adjustments:
• 

Deviations

• Weaker-than-expected top line coupled with disappointing guidance.

Dividends

• Declared 2nd single tier dividend of 2.4 sen (2QFY15: 2.3 sen) per share, which will go ex on 11 Mar. YTD amounted to 5.2 sen (1HFY15: 4.5 sen) per share.

Highlights

• Attributed the expansionary results solely to the favorable movement of USD against RM. For 2QFY16, the exchange rate averaged at RM4.28/USD, representing +5.9% qoq and +27.4% yoy.

• Citing Gartner’s report, Inari believes that smartphone market will grow 10% while worldwide semiconductor market is forecasted to grow at 1.9% to USD344.1bn in 2016.

• However, it observes that various major smartphone makers and suppliers are announcing decreased smartphone volume due to lower commodity prices and lower China growth.

• Blaming on that, Inari is seeing softness in 3QFY16 shipments although 4QFY16 remains positive. As such, it expects 3QFY16 results will be weaker yoy.

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

Forecasts

• Tweaked forecasts based on deviation and latest guidance. In turn, FY16-18 EPS were cut by 4.0-9.4%, respectively.

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

HOLD , TP: RM3.57

Positives

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

Negatives

• Innovation stalemate in telecommunication.

Valuation

Downgrade from BUY to HOLD after lowering our TP by 13.3% from RM4.12 to RM3.57, reflecting the downward EPS revision. TP is pegged to unchanged 15x of CY16 EPS.

Source: Hong Leong Investment Bank Research - 24 Feb 2016