Second quarter of improvement

1QFY17 core profit was flat yoy but within expectations. Continued expansion in its RF business remains a key growth driver which is in turn led by higher 4G adoption and increased chip complexity. Maintain BUY and target price of RM3.54.

1QFY17 core profit flat yoy – within expectations

Inari’s headline 1QFY17 net profit grew 6% yoy to RM48m. This was however due to forex gains amounting to RM6m for the quarter. Excluding this, 1QFY17 core profit was lower at RM42m (-0.6% yoy). This was however due to higher depreciation charges (+16% yoy) for its Plant P13. At the operating level, 1QFY17 EBITDA margin was slightly firmer at 20.3% vs 19.6% a year ago, possibly due to improved product mix. On the whole, results were in line with expectations, accounting for 23% and 22% of our and street FY17E estimates respectively. Inari announced a higher 1QFY17 DPS of 3 sen (1QFY16: 2.8 sen), in line with expectations.

Second consecutive quarter of growth

Sequentially, earnings momentum remained positive, and for the second consecutive quarter. Core profit was higher by 2% lifted by stronger revenue (+10% qoq). This is in tandem with the ongoing RF capacity expansion while coinciding with the strong production ramp up for a major customer. 1QFY17 EBITDA margin was however slightly weaker. We think this could possibly be due to costs incurred for its new Plant P21 and not too worried over the short term.

Maintain BUY and TP of RM3.54 (18x fully diluted CY17E EPS)

Near term, Inari’s growth should continue to be underpinned by its RF operations which are being led by increased 4G adoption and increased chip complexity. Longer term, earnings drivers are being put in place, namely through the expansion of its data server chip business. We also remain optimistic on potential new contracts with Osram, where several new development programmes have been initiated. Inari is also well positioned for Greater China through its investment in Taiwanese listed company PCL Technologies Ltd. Maintain our BUY rating and TP of RM3.54 (based on an unchanged 18x CY17E EPS). Key risks: a slowdown in global demand for smart devices, rapid ASP erosion, loss of customer base and the introduction of new technologies that may render Inari’s products obsolete.

Source: Affin Hwang Research - 22 Nov 2016