Although Inari’s 2Q FY18 revenue was seasonally weaker, core earnings grew 11% qoq on margin expansion. 1H FY18 earnings rose 85% yoy underpinned by growth in the RF business and aided by contribution from the IRIS IR product. 1H FY18 results were within expectations – accounting for 52-55% of our and street estimates for FY18E. Reaffirm BUY call and 12-month TP of RM4.28.

1HFY18 Core Profit Up 85% Yoy – Within Expectations

Inari’s 2Q FY18 core profit further improved to RM79.4m (+11% qoq), historically its highest, driven by margin expansion. Cumulative 1H FY18 core profit of RM151m (after excluding exceptional items comprising largely forex losses of RM14m) was higher by 85% yoy driven by expansion in the RF business and contribution from the IRIS IR product. We believe that contribution from the latter also aided the 7.5ppts yoy improvement in EBITDA margin to 27.7%. Inari also announced an interim DPS of 2.5 sen brining 1H FY18 DPS to 4.8sen.

Potentially New Business to Fill Plant P21 by 2H18

To recap, in 2017 Inari secured the IRIS IR product from Osram, which was partially intended to reduce single customer risk. We understand that the customer has been happy with production yields and given their recent expansion plans in Penang, they are looking to outsource additional products and potentially to Inari by this year. If materialised, this would be positive, as it would fill floorspace capacity at plant P21.

Reaffirm BUY Call and TP of RM4.28

Inari recently announced a 1 for 2 bonus issue to reward shareholders and to further improve stock trading liquidity. This exercise is expected to be completed by 2Q CY18. We reaffirm our BUY call and 12-month TP of RM4.28, based on 20x FY19E EPS. Inari is a country top pick as well as one of Daiwa’s top global tech picks for 2018. Key downside risks: sharp appreciation of the RM, 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 - 28 Feb 2018