Inari’s FY18 core net profit of RM264m (+43% YoY) was below HLIB’s but in line with street’s expectations. Declared fourth interim and special dividends totalled 2.0 sen per share. 4QFY18 reported earnings included a non-core disposal gain associated to CEEDTec. Stripping that off, 4QFY18 was weaker QoQ and YoY due to lower loading. Maintain HOLD with TP of RM2.07.

Below expectation. FY18 revenue of RM1.4bn translated into a slightly disappointing core net profit of RM264m, accounting for 94% HLIB full year forecasts. However, this is in line with consensus at 97%. The results shortfall resulted from our too bullish revenue projection.

Dividend. Declared fourth interim single tier and a special dividend of 1.6 and 0.4 sen per share respectively, which goes ex on 18 Sep. FY18 dividend amounted to 6.7 (FY17: 5.2) sen per share (based on enlarged share capital).

QoQ. Top line was lower by 8% to RM301m due to lower loading while partly aided by stronger USD. However, reported PATMI was higher by 3.5% inflated by non-core asset disposal and FOREX gains. Adjusting for those, core net profit actually plunged by 44%.

YoY. Turnover was lower by 13% due to lower loading compounded by USD depreciation (4QFY18: RM3.95/USD vs 4QFY17: RM4.33/USD). Stripping off non core items, core earnings fell by 32% as lower D&A was offset by higher effective tax rate.

FY18. Revenue and core earnings expanded by 17% and 43%, respectively mainly attributable to increase in demand of factory output and changes in product mix.

CEEDTec asset disposal. While keeping its factory, CEEDTec sold its intellectual properties and assets for a gain of RM23.7m. This has led to abnormally high MI charge of RM9.8m in 4QFY18 in accordance to Inari’s 51% stake.

Outlook. Management remains cautious, highlighting:

1. Global growth is becoming less synchronized and outlook is clouded by trade tensions;

2. Worldwide smartphone shipment returned to growth in 1QCY18 with 1.3% but mainly driven by low-end and entry-level models. This may signal challenges in Inari’s RF for flagship smartphones;

3. WSTS is projecting a 12.4% growth in 2018 followed by 4.4% in 2019 driven by sensors, optoelectronics and analogue which may bode well for Inari.

Inari will continue to focus on managing costs to improve margins. At the same time, it will work on new manufacturing projects while looking out for investment opportunities to enhance its overall growth.

Forecast. While lowering our sale assumptions, we also imputed a more favourable RM/USD rate of 4.10 (previously 4.00). As a result, FY19-20 EPS are toned down marginally by 3.0% and 2.7%, respectively. Reiterate HOLD with a higher fair value of RM2.07, pegged to higher PE multiple of 20x (previously 18x) of CY19 FD EPS, in line with its peers. Largest OSAT in Malaysia specializing in communication and networking segments which are poised to grow further. Pick up in new businesses and successful turnaround in Amertron will be catalysts.

Source: Hong Leong Investment Bank Research - 29 Aug 2018