INVESTMENT HIGHLIGHTS

• Weaker 1QFY19 normalised earnings (-27.6%yoy) in view of lower demand of the group’s product and high base effect

• As a result, Inari’s 1QFY19 financial performance failed to keep pace with ours and consensus’ expectations

• Lower 1QFY19 dividend announced in-tandem with the weaker earnings performance

• Maintain NEUTRAL with a revised target price of RM1.79

Weaker 1FY19 normalised earnings. Inari Amertron Bhd’s (Inari) normalised earnings amounted to RM52.0m, a reduction of -27.6%yoy. This was partly due to the disposal of 51%-owned subsidiary (Ceedtec) during the last financial year and comparatively lower volume loading on a major sensor product. In addition, 1QFY18 represents the group’s historical peak quarter to-date. All in, the group’s 1QFY18 financial performance trailed behind ours and consensus’ expectations, both accounting for 17.2% of full year FY19 earnings forecasts.

Dividend. Inari announced lower 1QFY19 dividend of 1.6sen (1QFY18: 2.3sen), in-line with the lower earnings recorded during the quarter. This translates into a dividend payout of 83.8% in comparison with 102.2% seen in 1QFY18.

Impact on earnings. We are reducing our FY19 and FY20 earnings forecasts to RM260.5m and RM277.3m to be on the conservative end. This is obtained after adjusting downward our FY19 and FY29 revenue growth assumption and imputing lower profit margin to better reflect the results thus far.

Target Price. We are revising our target price to RM1.79 (previously RM2.25). This is premised on FY20 EPS of 8.5sen pegged to an unchanged forward PER of 21x. 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.

Moving forward, we anticipated growth in volume order from existing customer to be lackluster which could keep profit margin at current level. Couple with high base effect, we expect earnings growth rate to decelerate in the near term. Meanwhile, we view that the current share price weakness has led to attractive dividend yield of five percent, supported by healthy cash level of more than RM500m. Key rerating catalyst would includes winning of new projects which would further diversify its earnings base and thus reduce the group’s dependency on its wireless RF segment. All factors considered, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 27 Nov 2018