Inari’s 1HFY19 core net profit of RM109m (-31% YoY) was below expectations mainly due to softer-than-expected top line. Declared second interim dividend of 1.5 sen per share. Apart from the unfavourable forex, weaker YoY turnover was impacted by lower sensor loading and the absence of CEEDTec’s contribution post disposal. We cut our sales projections which resulted in a lower TP of RM1.62. Maintain HOLD.

Below expectations. 1HFY19 revenue of RM626m translated into a disappointing core net profit of RM109m, accounting for 40% and 45% of HLIB and consensus full year forecasts, respectively. The deviation was mainly due to lower-than-expected revenue.

Dividend. Declared second interim single tier dividend of 1.5 sen per share, which goes ex on 13 Mar. 2QFY18 dividend was 1.6 sen per share based on enlarged share capital after the completion of 2 for 1 bonus issue. YTD dividend amounted to 3.1 sen per share (1HFY18: 3.1 sen).

QoQ. Top line was lower by 8% to RM300m due to demand weakness in sensor product while partly aided by stronger USD (2QFY19: RM4.17/USD vs 1QFY19: RM4.10/USD). However, core net profit was higher by 11% thanks to favourable product mix.

YoY. While forex was relatively stable, turnover was lower by 20% in the absence of CEEDTec contribution post-disposal and lower sensor loading. Stripping off non-core items, core earnings fell by 30% attributable to the weaker sales and changes in product mix.

YTD. Revenue was lower by 16% to RM626m along with 31% decline in core net profit which can be explained with the reasons mentioned above.

Outlook. WSTS expects world semiconductor market to register a much slower growth of 2.6% to USD490bn after expanding a remarkable 15.9% in 2018. Optoelectronics is projected to contribute the highest growth of 6.8% followed by sensors with 5.1% and discretes with 3.9%. In reference to that statistics, Inari guided that its optoelectronics remain resilient while RF is expected to be flattish amid challenges in the flagship smartphone. It also anticipates significant unevenness in growth across sectors and individual product lines over the next few quarters.

Going forward. For 2HFY19, Inari expects to maintain similar performance as 1HFY19 while continuing to focus on managing costs and margins. The group aims to implement Industry 4.0 in a bigger scale throughout the entire group to achieve greater efficiencies to drive down manufacturing costs.

Forecast. As we lower our sale assumptions, FY19-21 EPS are toned down by 12- 13%, respectively. Reiterate HOLD with a lower fair value of RM1.62 (from RM1.83), 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 - 22 Feb 2019