Inari’s 1QFY19 core net profit of RM52m (+35% QoQ, -32% YoY) was below expectations mainly due to softer-than-expected top line. Declared first interim dividend of 1.6 sen per share. Apart from the unfavourable forex, weaker YoY turnover was impacted by lower loading and the absence of CEEDTec’s contribution post disposal. We cut our sales projections and resulted in a lower TP of RM1.83. Maintain HOLD.

Below expectation. 1QFY19 revenue of RM326m translated into a disappointing core net profit of RM52m, accounting for 17% of both HLIB and consensus full year forecasts. The deviation was mainly due to lower-than-expected revenue.

Dividend. Declared first interim single tier dividend of 1.6 sen per share, which goes ex on 18 Dec. 1QFY18 dividend was 1.5 sen per share based on enlarged share capital after the completion of 2 for 1 bonus issue.

QoQ. Top line was higher by 8% to RM326m due to higher loading while partly aided by stronger USD (1QFY19: RM4.10/USD vs 4QFY18: RM3.95/USD). However, reported PATMI was lower by 10% as 4QFY18 was inflated by non-core asset disposal. Adjusting for that, core net profit was actually higher by 35%.

YoY. Turnover was lower by 13% in the absence of CEEDTec contribution post disposal and lower sensor loading compounded by USD depreciation (1QFY19: RM4.10/USD vs 1QFY18: RM4.26/USD). Stripping off non-core items, core earnings fell by 32% attributable to the weaker sales.

Outlook. Management highlighted that Inari’s performance is still consistent with WSTS and Gartner’s forecasts, whereby: 1. WSTS forecasted 2018 global semiconductor sales to be strong with a growth rate of 15.7% to reach USD477bn. All geography regions and product lines including memory, analog ICs, discrete and optoelectronics are expected to expand; and 2. Gartner projected worldwide smartphone sales to gain 2% YoY in 2018. Inari’s optoelectronics division registered growth in certain product lines while RF division experienced flat performance. Inari anticipates significant unevenness in growth across sectors, down to individual product lines over the next few quarters. Overall, management sees some challenges in RF due to the tepid demand for flagship smartphones, while optoelectronics continues to show resilience.

Going forward. Inari will continue to focus on managing costs and margins. The group aims to implement Industry 4.0 in a bigger scale to achieve greater efficiencies to drive down manufacturing costs.

Forecast. As we lower our sale assumptions, FY19-21 EPS are toned down by 11- 12%, respectively. Reiterate HOLD with a lower fair value of RM1.83 (from RM2.07), pegged to unchanged PE multiple of 20x of CY19 FD EPS. Inari is the 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 - 27 Nov 2018