Inari’s FY20 core net profit of RM141m (-23% YoY) was above HLIB’s expectation but in line with consensus. The higher-than-expected EBITDA margin and lower-than-expected tax rate are the key deviations. Declared forth interim dividend of 1.1 sen per share. Inari is expecting higher volumes for existing and new products in FY21 leveraging on the year-end launch of the blockbuster smartphone. We raise our FY21-22 earnings forecasts which resulted in a higher TP of RM2.24, pegged to 30x of CY21 EPS. Maintain HOLD.

Above expectation. 4QFY20 core net profit of RM39m (+77% QoQ, +18% YoY) brings FY20’s total to RM141m (-23% YoY), which is ahead of HLIB’s, accounting for 106% full year forecast but match consensus’ at 98%. The higher-than-expected EBITDA margin and lower-than-expected tax rate are the key deviations. 4QFY20 one-off adjustments include inventories write down (RM4.5m), PPE disposal gain (RM3.6m) and net forex loss (RM2.2m).

Dividend. Declared forth interim single tier dividend of 1.1 sen per share (4QFY19: 1.1 sen), which goes ex on 14 Sep. YTD dividend amounted to 4.4 sen per share (FY19: 5.2 sen).

QoQ. Despite the stronger USD (4QFY20: RM4.32/USD vs 3QFY20: RM4.17/USD), top line lost 4% to RM233m due to lower volume loading. However, core net profit surged by 77% to RM39m attributable to positive deferred tax provision of +RM2m vs. -RM6m in 3QFY20.

YoY. While forex was favourable (4QFY20: RM4.32/USD vs 4QFY19: RM4.15/USD), turnover was lower by 14% due to lower volume loading. Stripping off non-core items, core earnings gained by 18% attributable to the positive deferred tax provision.

YTD. Revenue fell by 8% due to lower optoelectronics demand and lower production volume. In turn, core earnings fell by 23% to RM141m no thanks to unfavourable product mix and higher D&A.

Outlook. Inari remains cautious on its prospects and stay to its core manufacturing activities to maintain and improve utilization of its existing plants’ capacities. It has implemented various measures to control costs and capex by streamlining operations to mitigate short term impact arising from regulatory controls from Co vid-19 whilst protecting employees’ welfare. Barring unforeseen circumstances, Inari is expecting higher volumes for existing and new products in FY21 leveraging on the year-end launch of the blockbuster smartphone. On the other hand, management also highlights the risks of USD depreciation and soaring gold prices impacts on earnings.

Forecast. After raising our margin assumptions, FY21-22 bottom lines were lifted by 13% and 25%, respectively. Reflecting the earnings uplift, we increase our TP to RM2.24 (from RM1.57), pegged to higher PE multiple of 30x (previously 25x) of CY21 FD EPS. However, we maintain our HOLD rating on the stock. While we are hopeful that it will recover in 1HFY21 stimulated by the launch of new blockbuster smartphones, 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 Aug 2020