Inari’s 1QFY18 core earnings were ahead of our expectations despite our forecast being 11% ahead of the street’s. While they account for 25% of our full-year forecast, 2H has traditionally been stronger. We leave our forecast unchanged but note that there is room for further upgrades should revenue growth and margin expansion be sustained. Maintain BUY and 12-month target price of RM3.00.

1QFY18 Core Profit Up 71% Yoy – Above Our Expectations

Inari’s 1QFY18 core profit of RM72m (+71% yoy) was a new quarterly record for the group. Earnings appear on track to achieve our full-year forecast of RM286m although we think that they could exceed our expectations as 2H has traditionally been stronger as the RF division ramps up to meet demand from its customer’s launch. Overall, the better earnings were driven by firm utilisation at its RF segment but more so from contribution from the IRIS IR chip which started only from April 2017. We estimate that margins for the new IRIS IR chip are better than that for the existing RF business, leading to a 6.2ppt yoy increase in the 1QFY18 EBITDA margin to 26.5%. Inari announced a 1QFY18 DPS of 2.3 sen, in line with our full-year expectations of 10 sen.

Positive Earnings Momentum

Sequentially, the earnings momentum remained strong (+24% qoq) on the back of higher production volumes for the IRIS IR chip. In 4QFY17, Inari was operating close to its monthly capacity of 5m units/month only towards the end of the quarter. So, there would have been a full-quarter contribution at maximum capacity from the IRIS IR chip in 1QFY18. We understand that the installed capacity has recently been increased to 10m units/month.

Maintain BUY and TP of RM3.00

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 the expansion of its data server chip business. We maintain our BUY call and TP of RM3.00 (based on 20x CY18E EPS). Key downside 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 2017