INVESTMENT HIGHLIGHTS

• 9MFY18 earnings kept pace with expectations, driven primarily by higher demand of the group’s products
• Dividend yield expected to hover around 3% in anticipation of intensive capital spending
• Valuation appears stretched at this juncture
• Maintain NEUTRAL with an unchanged target price of RM2.08

Steady earnings growth. Inari Amertron Bhd’s (Inari) 3QFY18 normalised earnings came in at RM57.2m. This represents an increase of +14.8%yoy. The increase in normalised earnings was mainly driven by increase in demand of the group’s output on a year-over-year basis and changes in product mix of demand. Note that the group’s revenue rose by +18.9%yoy to RM325.8m. However, the expansion in earnings was partially impacted by higher depreciation cost and increase in taxation.

Earnings kept pace with expectation. Driven by the improvement in 3QFY18 financial performance, the group’s 9MFY18 normalised earnings amounted to RM196.7m. This represents an increase of +40.4%yoy. This came in within ours and consensus expectations, accounting for 71.5% and 71.8% of full year FY18 earnings estimates respectively.

Dividend. As expected, Inari reduced its 3QFY18 dividend payment to 1.6sen from 2.2sen as at 3QFY17. This led to 9MFY18 cumulative dividend payment of 6.4sen (9MFY17: 7.0sen). We view that the group is limiting the dividend payout in order to allocate more cash to fund future capital expenditure (capex) needs.

Target Price. We are maintaining our target price of RM2.08. This is premised on FY19 EPS of 9.8sen pegged to unchanged FY19 forward PER of 21.2x. Our target PER is based on its five year historical high rolling PER.

Maintain NEUTRAL. 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. Meanwhile, in anticipation of hefty future capital spending, we expect dividend yield to be approximately three percent. On another, we view that the stock valuation of more than 20x is currently stretched. All factors considered, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 23 May 2018