Inari’s 1HFY19 core net profit of RM109m (-28% yoy) was in line with our expectations. Softer loadings for the RF division and at its sensor division as well as a stronger RM resulted in the weaker earnings yoy. Earnings may remain soft for a further quarter and the stock may lack any near-term catalyst. However, we recommend gradually increasing positions in advance of the 5G rollout. We reaffirm our BUY call and the 12-month target price of RM1.89.

Better Sequentially, Within Expectations

2QFY19 core profit was higher against the previous quarter (+9%) and largely within our expectation. We believe that the RF segment continued to remain soft, operating at 60-70% utilisation levels amidst weakness in end demand from its key smartphone customers. The sensor business has also yet to fully take off, awaiting further design input by its customer for the entire product portfolio. Likewise, Inari has yet to fully benefit from a full ramp-up in the mini LED product.

1HFY19 Core Earnings Fell 28% Yoy

1HFY19 core earnings was weaker, declining 28% yoy largely due to a combination of softer RF volumes, absence of contribution from Ceedtec (which was disposed off in 3QFY18) and also lower sensor volumes (the IRIS IR sensor product was operating at c.9m units/month a year ago). We attribute the sharp contraction in 1HFY19 EBITDA margin (-2.1ppts yoy) predominantly to the latter which we understand was a key driver behind the sharp margin improvement for the group in the previous year. Inari announced a DPS of 1.5sen, bringing 1HFY19 DPS to 3.1 sen.

Reaffirm BUY and Target Price of RM1.89

We raise our FY19 EPS forecast slightly to account for the EI in the quarter. Maintain our BUY rating and 12-month TP of RM1.89 (based on 24x CY19E EPS). Inari remains one of our high conviction 5G picks, being a key beneficiary of a multiple-fold increase in RF filters with the transition to the new standard. We also remain optimistic over the new sensor business while it seeks to improve its customer base and fill capacity at its new facility in Batu Kawan. Downside risks: loss of customers, a sharp appreciation of the RM and weak demand for smartphones.

Source: Affin Hwang Research - 22 Feb 2019