Inari’s 9MFY20 core net profit fell 32% yoy on lower margins, a result of lower revenues and a higher effective tax rate. 9MFY20 revenue declined, impacted by lower opto revenue, but we suspect that RF revenue growth was sustained. The lockdowns in China and Malaysia likely contributed to the 5% yoy decline in revenue, its lowest quarterly figure since 3Q16. The earnings accounted for just 67% and 61% of consensus and our expectations respectively. We cut the FY20-22E EPS by 9-25% to factor in the results and also turn less optimistic on near-term growth given the negative impact of Covid-19 on end-demand. Nonetheless, we reaffirm our BUY call with a higher 12-month TP of RM1.53 as we see Inari as a compelling 5G play.

3QFY20 Earnings Down Sequentially

Already in a seasonally soft quarter, Inari suffered another blow from Covid-19 when its China plant underwent a lockdown. 3QFY20 revenue and profit dropped 9% and 33% respectively. In addition, the Malaysian plant operated at a 50% capacity from March 18 after the lockdown was implemented. Margins were also impacted by the additional costs of ensuring the safety of its staff and implementing social distancing.

9MFY20 Below Expectations

For 9MFY20, the core profit of RM102m (-32% yoy) was below expectations accounting for 67% of our full-year forecast. The disappointment was due to lower-than-expected revenue and margins. Partially impacted by the lockdown, Inari was also impacted by the lower opto revenue, which has yet to revert to previous years’ highs. The production capacity of sensor volumes remained at a fraction of its peak.

BUY With Higher Target Price of RM1.53

We cut our FY21-22E EPS by 9-25% as we impute a less aggressive recovery in demand and hence earnings, but also lower our margin assumptions on the rising cost of operations. We roll forward our valuation horizon to CY21, and the TP is raised to RM1.53 from RM1.31 previously, based on an unchanged target PE multiple of 20x. We reiterate our BUY rating as Inari remains a compelling 5G play. Downside risks: delay in 5G rollout, loss of customers, a sharp appreciation of the RM and weak demand for smartphones.

Source: Affin Hwang Research - 22 May 2020