Inari’s 9MFY20 core net profit of RM102m (-32% YoY) was below expectations as lower order loading led to diminishing economies of scale . Declared third interim dividend of 1.0 sen per share. The lacklustre performance was due to weakness in volume loading, specifically optoelectronics and production disruptions across all its plants. We cut our FY20-22 earnings forecasts which resulted in a lower TP of RM1.28, pegged to 20x of CY21 EPS. However, we upgrade the stock to HOLD after the share price has retraced 26% since our last downgrade.

Below expectations. 3QFY20 core net profit of RM22m (-35% QoQ, -48% YoY) brings 9MFY20’s total to RM102m (-32% YoY), which only accounted for 51% and 62% of HLIB and consensus full year forecasts, respectively. This disappointment was mainly due to lower order loading leading to weaker EBITDA margin as economies of scale diminishes. 3QFY20 one-off adjustments include inventories reversal (RM0.7m), PPE disposal gain (RM5k) and forex gain (RM13m).

Dividend. Declared third interim single tier dividend of 1.0 sen per share (3QFY19: 1.0 sen), which goes ex on 15 Jun. YTD dividend amounted to 3.3 sen per share (9MFY19: 4.1 sen).

QoQ. While forex was relatively stable at RM4.17/USD, top line lost 9% to RM243m due to lower volume loading and production disruption at China and Philippines plants as result of government lockdowns to contain Covid-19. Filtering down, core net profit deteriorated by 35% to RM22m attributable to less favourable sales mix and lower operating leverage as core EBITDA margin fell by 2ppt to 21%.

YoY. Despite the stronger USD (3QFY20: RM4.17/USD vs 3QFY19: RM4.09/USD), turnover was lower by 5% due to lower contribution from optoelectronics products in Jan and Feb while production volumes at all plants were lower due to lockdowns . Stripping off non-core items, core earnings fell by 48% attributable to the weaker sales, changes in product mix and higher D&A.

YTD. For the same reasons above, revenue and core earnings contracted by 7% and 32%, respectively.

Virus impact. (1) Malaysia operations were affected partially by the MCO since 18 Mar; (2) China plant was under complete lockdown between 30 Jan and 16 Feb, only at subpar utilization until 31 Mar; and (3) Philippines plant has been affected by the Enhanced Community Quarantine since 17 Mar.

Outlook. In view of the uncertainties due to Covid-19 outbreak, Inari is cautious on its prospects and stays focus on core manufacturing activities to maintain and improve utilization of existing capacities. It has implemented various cost and capex control measures, and continuously streamline its operations to mitigate short term impact arising from regulatory controls due to this pandemic

Forecast. After lowering our sales and margin assumptions, FY20-22 bottom line was cut by 33%, 3% and 3%, respectively. Reflecting the earnings cut, we lower our TP to RM1.28 (from RM1.32), pegged to unchanged PE multiple of 20x of CY21 FD EPS. However, we upgrade the stock to

HOLD (from Sell) as share price has declined 26% since our downgrade in Nov 2019. While we are hopeful that it will recover in 1HFY21 stimulated by the launch of new blockbuster smartphone, the threat of its RF product being substituted by end-to-end (modem-RFFE-antenna) solution lingers on.

Source: Hong Leong Investment Bank Research - 28 May 2020