Inari’s results were in line with street expectations but fell below our forecasts. Nevertheless, Inari reported its strongest revenue and profit, with core EPS growing a hefty 37% yoy. We continue to believe in Inari’s growth prospects which will be fuelled by a combination of new products and expansion. Maintain BUY and target price of RM2.80.

FY18 Core Profit Up 37% Yoy

Inari reported a FY18 core profit of RM264.5m (+37% yoy), which was in line with the street (97% of street estimates) but slightly below our estimates (91% of our forecast). The variance against our forecast was due to lower-than-expected revenue and a higher-than-expected tax rate. There was a noticeable slowdown in 4QFY18 revenue (-8% qoq) at its RF division. Meanwhile, the pioneer tax status for some of its older RF products expired and they were subject to tax. A key development was the disposal of Ceedtec’s IP assets which garnered a net gain on disposal of RM10m, based on Inari’s 51% stake in Ceedtec. The contribution from this unit has thus far been negligible, although the sale should ultimately improve Inari’s cash flow, in our view.

Another Milestone and Record

On the whole, despite the narrow disappointment, the results nevertheless achieved another milestone and record-high for Inari. Also, apart from the revenue growth (despite the impact from a stronger RM), its FY18 EBITDA margin further improved by 4.2ppts yoy to 27%, a reflection of its strong cost controls and economies of scale.

Maintain BUY

We cut our FY19-20E EPS by 20% and 15% respectively, lowering our growth expectations. However, we still project a strong 28% EPS growth in FY19E on the back of continued growth in its RF business combined with the new product line-ups from Osram, which includes a health sensor, facial recognition and a mini LED product in addition to the IRIS chip. We maintain our BUY rating with an unchanged target price of RM2.80 - based on a higher PE multiple of 24x (from 20x) given its strong track record and above-average ROEs of 30% on our lower CY19E EPS. 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 - 29 Aug 2018