INVESTMENT HIGHLIGHTS

• 2QFY18 normalised earnings grew +48.5%yoy driven by strong demand of the group’s products and improvement in net profit margin
• 1HFY18 normalised earnings came in within ours and consensus expectations
• Dividend yield to hover around 3% in anticipation of intensive capital spending
• Valuation appears stretched at this juncture
• Downgrade to NEUTRAL with an unchanged target price of RM3.26

Strong 2QFY18 performance. Inari Amertron Bhd’s (Inari) 2QFY18 normalised earnings came in at RM76.7m. This represents an increase of +48.5%yoy. The increase in normalised earnings was mainly driven by overwhelming demand of the group’s products and improvement in profit margin to 21.4%. Note that the group’s revenue rose by +34.6%yoy to RM749.1m.

Earnings came in as expected. Driven by the improvement in 2QFY18 financial performance, the group’s 1HFY18 normalised earnings amounted to RM148.7m. This represents an increase of +53.2yoy. This came in within ours and consensus expectations, accounting for 50.7% and 50.1% of full year FY18 earnings estimates respectively.

Dividend. Inari announced 2QFY18 dividend of 2.5sen per share. This led to 1HFY18 dividend of 4.8sen per share, in-tandem with that declared for 1FHY17. Despite recording better earnings, we view that the group is capping the dividend payout in order to allocate more cash to fund future capital expenditure (capex) needs. For 1HFY18, the group has acquired RM100.4m worth of property, plant and equipment as compared to RM52.8m spent in 1HFY17.

Impact. No change to our earnings estimate at this juncture. However, we are cutting FY18 and FY19 dividend assumption to 9.9sen and 11.5sen per share from 10.6sen and 12.7sen per share respectively in anticipation of higher capital spending.

Target Price. We maintain our target price of RM3.26. 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.

Source: MIDF Research - 28 Feb 2018