Inari’s FY19 core net profit of RM183m (-31% YoY) was below expectations mainly due to weak EBITDA margin and higher-than-expected corporate tax rate. Declared fourth interim dividend of 1.1 sen per share. Despite the favourable forex, turnover was weaker impacted by lower volume loading and absence of CEEDTec’s contribution post disposal. We cut our FY20-21 earnings forecasts which resulted in a lower TP of RM1.40, pegged to 20x of CY20 EPS. Maintain HOLD.

Below expectations. 4QFY19 core net profit of RM33m (-22% QoQ, -15% YoY) took FY19’s total to RM183m (-31% YoY), forming 86% and 91% of HLIB and consensus full year forecasts, respectively. The shortfall was attributed to weak EBITDA margin and higher-than-expected effective corporate tax rate. One-off adjustments include reversal of inventories and forex gains.

Dividend. Declared fourth interim single tier dividend of 1.1 sen per share (4QFY18: 2.0 sen), which goes ex on 19 Sep. YTD dividend amounted to 5.2 sen per share (FY18: 6.7 sen per share based on enlarged share capital after the completion of 2 for 1 bonus issue).

QoQ. Top line was stronger by 6% to RM271m due to higher volume loading and partly aided by favourable forex (4QFY19: RM4.15/USD vs 3QFY19: RM4.09/USD). However, core net profit plunged -22% to RM33m impacted by weaker margin and higher corporate tax rate (4QFY19: 22% vs 3QFY19: 9%).

YoY. Despite the favourable forex (4QFY19: RM4.15/USD vs 4QFY18: RM3.95/USD), turnover was lower by -10% in the absence of CEEDTec contribution post-disposal and lower volume loading. Stripping off non-core items, core earnings fell by -15% attributable to the weaker sales, changes in product mix and higher D&A.

YTD. Despite the forex boost, revenue was lower by 16% to RM1.15bn along with 31% decline in core net profit which can be explained with the reasons mentioned above.

Outlook. After expanding a remarkable 15.9% in 2018, worldwide semiconductor market recorded a contraction of 14.5% in 1H19. Modest growth (5.4%) is only expected to return in 2020. According to Gartner, mobile phone shipments are estimated to reach 1.5bn units in 2019, a decline of 2.5% YoY and are forecasted to return to growth in 2020 at 2.8% driven by broader availability of 5G models.

Going forward. Inari’s performance was consistent with market trends. In 4QFY19, RF and new products registered growth while optoelectronics was flat. However, it expects 1HFY20 to improve 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. Tweaked our assumptions based on the deviations mentioned above. In turn, FY20-21 bottom line was cut by 7% and 10%, respectively. FY21 forecast is also introduced.

Reiterate HOLD with a lower fair value of RM1.40 (from RM1.42) reflecting earnings cut while valuation is also rolled forward. Our TP is pegged to unchanged PE multiple of 20x of CY20 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 - 29 Aug 2019