• 4QFY20 Core Profit Jumped 52% Qoq on Higher Margins and a Tax Credit
• Core profit was 7% above our estimate – hopefully an end to the earnings disappointments seen over the past few quarters.
• Remains a high conviction 5G pick as adoption of the technology should catalyse earnings. Maintain BUY.

4QY20 Pleasantly Surprised, Core Profit Up 52% Qoq

While its China operations resumed in 4QFY20, the Philippines and Malaysian operations still remained in partial lockdowns. This not only contributed to the weaker revenue qoq but also resulted in higher overheads as overtime pays were required to sustain production output. We believe that utilisation rate for its RF segment continued to remain weak at the c.65% level in 4QFY20. However, we believe that management managed to contain costs well, and despite the lower operating leverage, 4QFY20 EBITDA margin grew 3.0ppts qoq to 24.2%. Together with a tax credit, 4QFY20 core profit jumped 52% qoq

FY20 Results 7% Above Our Expectation, in Line With Street’s

FY20 core net profit was lower at RM136m (-26% yoy), a result of lower revenue and hence operating leverage and weaker EBITDA margin (-2.2ppts yoy). The latter was also due to unfavourable product mix due to a shift towards the older RF products. Lower revenue was largely the result of production halts as a result of the lockdowns and also the weaker opto electronic market and automotive markets in the Philippines and China respectively. Overall, the earnings surprise was from the better-than- expected margins in 4QFY20 and the lower-than-expected tax charge.

Maintain BUY With a 12-month TP of RM3.07

No changes to our forecasts but we introduce our FY23E EPS of 13.1 sen (+28% yoy). Inari remains a high conviction 5G pick as the largest RF test house in the region and its exposure to leading smartphone brands. We see the transition to 5G as a key catalyst to Inari’s earnings over the near term. We forecast a strong FY20-23E earnings CAGR of 46%, largely underpinned by the 5G cycle. Maintain BUY with an unchanged 12-month TP of RM3.07 based on 35x its CY21E earnings. Key downside risks to our call include its key customer losing market share in the RF space, weak consumption spending and demand for smartphones, insufficient production floor workers and skilled engineers and a sharp rise in the RM vs the US$.

Source: Affin Hwang Research - 28 Aug 2020