Inari’s 9MFY19 core net profit of RM151m (-33% YoY) was below expectations mainly due to softer-than-expected top line. Declared third interim dividend of 1.0 sen per share. While forex was relatively stable, weaker YoY turnover was impacted by lower sensor loading, the absence of CEEDTec’s contribution post disposal and higher D&A. We cut our sales projections which resulted in a lower TP of RM1.42. Maintain HOLD.

Below expectations. 9MFY19 revenue of RM882m translated into a disappointing core net profit of RM151m, accounting for 64% and 68% of HLIB and consensus full year forecasts, respectively. This is the third consecutive quarterly upset which was mainly due to lower-than-expected revenue.

Dividend. Declared third interim single tier dividend of 1.0 sen per share (3QFY18: 1.6 sen), which goes ex on 13 Jun. YTD dividend amounted to 4.1 sen per share (9MFY18: 4.7 sen based on enlarged share capital after the completion of 2 for 1 bonus issue).

QoQ. Top line was lower by -15% to RM256m due to weaker demand in sensor product and stronger RM (3QFY19: RM4.09/USD vs 2QFY19: RM4.17/USD). As a result, core net profit plunged -27% to RM42m (after adjusting for forex loss impact) which also partly impacted by higher D&A.

YoY. Despite the favourable forex (3QFY19: RM4.09/USD vs 3QFY18: RM3.92/USD), turnover was lower by -21% in the absence of CEEDTec contribution post-disposal and lower sensor loading. Stripping off non-core items, core earnings fell by -39% attributable to the weaker sales, changes in product mix and higher D&A.

YTD. While forex was relatively stable, revenue was lower by -18% to RM882m along with -33% decline in core net profit which can be explained with the reasons mentioned above.

Outlook. After expanding a remarkable 15.9% in 2018, WSTS expects worldwide semiconductor market to register a -3% contraction to USD455bn, a sharp contrast from previous projection of 2.6% growth earlier. Modest growth is only expected to return in 2020. For 2019, memory is expected to drop by -14.2% while all other products are forecasted to grow at low single digit relative to 2018. According to Gartner, mobile phone shipments are estimated to reach 1.8bn units in 2019, a decline of -0.5% YoY and are forecasted to return to growth in 2020 at 1.2%.

Going forward. Inari expects to post similar performance as the current YTD trend. However, it expects 1HFY20 to see some recovery based on the guidance from its customers. Nonetheless, Inari also warned that short term outlook is clouded by geo political events including the on-going US-China trade war and Brexit.

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 RM1.42 (from RM1.62), 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 - 30 May 2019