Investment Highlights

• 1QFY18 normalised earnings surged by more than +40% due to overwhelming demand of the group’s product

• Profit margin expanded to approximately 19% from 14% previously

• Dividend payment capped due to anticipated higher allocation for capital spending

• Upgrade to BUY with a revised target price of RM3.26

Strong 1QFY18 performance. Inari Amertron Bhd’s (Inari) normalised 1QFY18 earnings came in at RM71.8m. This represents an increase of +41.9%yoy. The increase in earnings was mainly driven by overwhelming demand of the group’s existing and new products which came on-stream during the past two quarters. The changes in product mix also led to improvements in profit margin.

Earnings surpass expectation. All in, the group’s 1QFY18 financial performance came in above our expectation, but within consensus estimates, accounting for 33% and 27.9% of full year FY18 earnings estimates respectively.

Dividend. Inari announced 1QFY18 dividend of 2.3sen per share. This is lower as compared to 3sen per share announced in 1FY17. We suspect that the group may be allocating more cash to fund future capital expenditure (capex) needs. During the quarter-in-review, the group has acquired RM66.8m worth of property, plant and equipment as compared to RM166.4m spent in 1QFY17. Note that Inari’s cash reserve grew by +3.1%yoy to RM469.2m. In view of this, we are reducing our FY18 and FY19 dividend assumption to 10.6sen and 12.7sen respectively.

Impact on earnings. Taking into consideration the better-thanexpected 1QFY18 earnings performance, we revising upward FY18 and FY19 earnings estimates by +26.3% and +29.0% respectively. We imputed higher demand mainly for the RF filter and assumed higher profit margin to be reflect the group’s financial performance thus far.

Target Price. We roll forward our valuation base year to FY19 and derive a new target price of RM3.26 (previously RM2.29). This is premised on FY19 EPS of 15.4sen pegged to unchanged FY19 forward PER of 21.2x. Our target PER is based on its five year historical high rolling PER.

Upgrade to BUY. Inari’s strategic positioning within the semiconductor value chain has proven to be in favour of the group. The group’s various core business segments (i.e. wireless RF, optoelectronics and iris scan product) have been recording better financial performance due to healthier demand of its product. The favourable mix of the group’s product offerings has also lead to healthier profit margin. Coupled with financial advantages from MIDA, the group’s strong cash generating ability has enable the group to build a sizeable cash reserve which is crucial in meeting the future capex requirement. All factors considered, we are upgrading the stock recommendation to BUY from neutral previously.

Source: MIDF Research - 22 Nov 2017