Inari’s 9MFY19 core net profit of RM150m (-31% yoy) was slightly below expectations due to lower contribution from its IRIS IR chip, softer RF volumes and the absence of contribution from its Ceedtec EMS business which had been disposed in 4QFY18. We see the key catalysts in a 5G rollout and the implementation of this technology by device manufacturers. However, better clarity on this will likely unfold once the spectrum for this technology is clearly defined. We reaffirm our BUY call and raise our 12-month target price to RM1.96.

Weaker Due to High Base in FY18, Slightly Below Expectations

Off a higher base last year when Inari was running near full capacity for its IRIS IR chip, which contributed significantly to its earnings, 9MFY19 core profit of RM150m was 31% lower yoy due to a sharp contraction in production of the same. Absence of revenue contribution from Ceedtec after the disposal of its operations in 4QFY18 also resulted in the weaker revenue yoy. The EBITDA margin contracted 1.8ppts yoy to 26.3% largely due to the former. On the whole, 9MFY19 earnings were slightly below expectations, accounting for 70% and 68% of our and street expectations respectively due to weaker-than-expected revenue and margins. Inari announced a DPS of 1sen, bringing 9MFY19 DPS to 4.1 sen.

3QFY19 Core Earnings Fell 27% Qoq

Sequentially, earnings were seasonally weaker although we believe that weak end demand for its end-customers’ smartphones had also taken a toll on Inari’s RF segment. Nevertheless, higher RF content in the newer devices had most likely mitigated some of this production volume weakness.

Reaffirm BUY, Target Price Lifted to RM1.96

We cut our FY19-21E EPS by 5-8% post the results, and apply a lower target PE of 20x, its 5-year mean PE (from 24x previously), on our CY20E EPS (rolled forward from CY19E) to derive a slightly higher 12-month TP of RM1.96. We reaffirm our BUY rating. Inari is likely to be a key beneficiary from the transition to 5G technology as we expect a multi-fold increase in RF filters for the next generation devices. New capacity has already been installed and is awaiting a ramp-up in production. Downside risks: loss of customers, a sharp appreciation of the RM and weak demand for smartphones.

Source: Affin Hwang Research - 24 May 2019