Inari’s FY19 core net profit was weaker at RM185m (-27% yoy) largely due to the larger base in FY18 which was lifted by contribution from its IRIS IR chip and contribution from its EMS business which was subsequently disposed off. Regardless, RF volumes have been softer yoy due to weaker end demand for its end customer’s smartphones. Despite this, its immediate customer has continued loading RF testers, in anticipation of an imminent 5G rollout. We remain upbeat and reaffirm our BUY call but at a lower 12-month target price of RM1.79.

Hit by Higher Deferred Tax in 4QFY19

Inari reported a stronger set of revenue and pretax earnings sequentially, partially due to the low base in 3QFY19 on the back of weak utilisation levels for its RF segment. However, the effective tax rate was surprisingly high at 22% in 4QFY19, resulting in some slight earnings disappointment. Results accounted for 93% of our FY19 forecast and the variance largely due to this. We expect the RF segment to continue to remain strong heading into 1QFY20, due to seasonality but also driven by the new RF filters for the current 4G advance models where density and complexity of the chip has once again been enhanced.

Lower Earnings in FY19, But Largely Expected

Cumulatively, Inari’s FY19 earnings was weaker due to a combination of lower sensor volumes, absence of revenue contribution from Ceedtec after the disposal of its operations in 4QFY18 and weaker utilisation levels for its RF segment. Importantly, despite the lower revenue, EBITDA margins remained well contained at the 25.7% level (-1.6ppts yoy) despite the lower contribution from the highly profitable sensor segment.

Reaffirm BUY But at a Lower Target Price of RM1.79

We trim earnings to take into account softer-than expected RF loadings. However, we maintain a BUY rating but with a lower 12-month TP of RM1.79 (based on a target PE multiple of 20x on revised 2020E EPS). Apart from Inari’s growth prospects (from expansion of its RF business as well as its new facility in Batu Kawan), dividend yields at 3% are also decent. Downside risks: delay in 5G rollout, loss of customers, a sharp appreciation of the RM and weak demand for smartphones.

Source: Affin Hwang Research - 29 Aug 2019