4QFY17 results positively surprised and earnings ended at record levels once again. The 32% yoy growth in FY17 core earnings was driven both by revenue and margin expansion. The latter was also aided by maiden contribution from the new IRIS IR led product. Maintain BUY with a higher target price of RM3.

Record Level Revenue and Earnings in 4QFY17

Apart from higher contribution from the data server segment, a seasonally strong quarter for its RF division, which is driven by higher production and product complexity, Inari saw maiden full quarter contribution from its IRIS IR chip in 4QFY17. Production for the latter was running at its installed capacity of 5m units/month towards the latter part of 4QFY17. This contributed to the 26% and 9% qoq surge in 4QFY17 revenue and core profit respectively. We estimate that the IRIS IR chip would have contributed nearly RM26m to Inari’s topline during the quarter, or 8% of group revenue. Assuming 4QFY17 core net profit margins for the RF and legacy business was c. 16-17%, we estimate that net margins for this new product to be >20%. We understand that the higher margins are attributed to the higher value add of this new IRIS IR chip notwithstanding that it is also a new product recently outsourced. This thus contributed to the further margin improvement (FY17: 22.8% or +3.5ppts yoy) albeit the better operating leverage for its RF segment.

FY17 Results – Above Our Expectations

For full year FY17, core profit of RM193m (+32% yoy) was slightly ahead of our expectations, accounting for 108% of our FY17 estimates (97% of street), due to better than expected margins. Overall, the stronger set of earnings yoy was underpinned by the stronger revenue (+13% yoy) (FY16 was impacted by an inventory correction), a firmer EBITDA margin of 22.8% and contribution from the IRIS IR chip business. Inari also announced a final quarter DPS of 2.8sen bringing FY17 DPS to 9.8 sen (FY16: 8.4sen).

Maintain Buy, Target Price Raised to RM3

We fine tune our 2018-19E earning assumptions after taking into account the full year results and also better visibility from the IRIS IR chip. Overall we raise our FY18-19E EPS estimates by 7-8%. We also value the stock based on 20x CY2018E EPS (previously FY18E EPS) resulting in a higher TP of RM3. Maintain BUY. Key risks: a slowdown in global demand for smart devices, rapid ASP erosion and a loss of its customer base.

Source: Affin Hwang Research - 16 Aug 2017