Further shipment deferments cannot be ruled out

While the blip in the RF division in 3QFY6/16 was expected, we caution that further deferment of shipment beyond that is not impossible as its main end client (a premium smartphone maker) has continued to guide for inventory rationalisation. We keep our forecasts unchanged pending an analyst briefing today. Over the longer term, Inari’s outlook remains intact with potential job wins following its latest plant acquisition. Maintain BUY; MYR3.20 TP (15x CY17 PER) is unchanged.

Within our expectations but below street’s

3QFY6/16 core net profit of MYR22m (-48% QoQ, -44% YoY) took 9MFY6/16 core earnings to MYR109m (-4% YoY), meeting 74%/67% of our/consensus full-year forecasts. The 26% QoQ decline in revenue (-5% YoY) was largely due to lower volume loading of the RF division, exacerbated by a stronger MYR vs USD (USD/MYR: 3QFY6/16 avg of 4.19 vs 2QFY6/16 avg of 4.29). Coupled with total forex losses of MYR7m, group operating margins contracted by 4.3ppts QoQ in 3QFY6/16. An interim dividend of 1sen (vs 2.4sen in 2QFY6/16, to go ex on 8 Jun 2016) took 9MFY6/16 to-date DPS to 6.2sen (53% DPR), above our estimate of 6.1sen (40% DPR assumption).

Clarity needed on the RF division

While we remain positive on Inari as a key OSAT to Broadcom for the premium RF product (i.e. FBAR filter), the recent inventory adjustments seem to be prolonged, raising concerns over Inari’s near-term earnings recovery. Looking beyond, we are still positive on Broadcom’s premium FBAR filter which is expected to benefit from growing adoption of the faster LTE/LTE-A cellular network.

Expect a knee-jerk reaction to share price

Inari’s share price may react negatively following this weak set of results; a first major shortfall in earnings in 4 years. At MYR157m, consensus earnings appear optimistic, expecting Inari to report MYR48m profit in 4QFY6/16. Our forecasts are unchanged for now; maintain BUY.

Source: Maybank Research - 19 May 2016