Despite the 6% appreciation of the RM vs the US$ and a seasonally weak quarter, Inari posted a strong set of 9MFY18 results - above expectations (76% and 80% of our and street FY18 estimates). Margins remained solid despite peers showing sharp contractions during the quarter. With an expected stronger 4QFY18, we believe that there could be positive earnings revisions. Maintain BUY and 12- month target price of RM2.80.

9MFY18 Core Profit Up 62% Yoy – Tracking Above Expectations

3QFY18 core earnings of RM67m were weaker by 16% qoq, although much anticipated given the seasonality. However, we are quite pleased with the results considering the 6% appreciation of the RM and that this had a negligible impact on the overall EBITDA margin. 9MFY18 results accounted for 76% of our forecast and are tracking slightly ahead given that 4QFY18 is seasonally a strong quarter. We conservatively maintain our forecasts.

Exciting Prospects in the Pipeline

Inari remains our top sector pick and a country pick. We like management’s growth plans, which go beyond its RF assembly and testing business and should on their own see exciting prospects with the completion of new floor space capacity at plant P13B-1. We believe that this will partially cater to the ramp of the RF business once 5G migration takes place. Management remains focussed on addressing single customer risk and is making good progress in sourcing for new projects from Osram. We understand that a mini LED assembly project is in the works and could positively contribute in FY19E. Management has further plans to diversify its customer base once its Batu Kawan facility is up, although this will unlikely be in the near term.

Maintain BUY

Our revised target price of RM2.80 (based on an unchanged PER of 20x) is adjusted for the recent 1 for 2 bonus issue, ESOS and also takes into account our valuation horizon which we have rolled forward to CY19. On the back of its solid growth prospects and execution, we maintain our Buy rating on the stock. 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 - 23 May 2018