INVESTMENT HIGHLIGHTS

• Lower demand and changes in product mix lead to -28.6%yoy contraction in 2FY19 normalised earnings

• Cumulative 1HFY19 normalised earnings of RM107.9m failed to kept pace with ours and consensus expectations

• 1HFY19 dividend reduced to 3.1sen in line with the weaker cash generating capability

• Maintain NEUTRAL with a revised target price of RM1.41

Weaker 2FY19 normalised earnings. Inari Amertron Bhd’s (Inari) normalised earnings reduced to RM56.7m (-28.6%yoy). This was mainly attributable to lower production volume and changes in product mix. Note that there is lower volume loading on a major sensor product. This lead to lower cumulative 1HFY19 normalised earnings of RM107.9m (-28.6%yoy). All in, the group’s 1HFY19 financial performance trailed behind ours and consensus expectations, accounting for 41.4% and 44.7% of full year FY19 earnings forecasts.

Dividend. Inari announced lower 2QFY19 dividend of 1.5sen (2QFY18: 2.5sen), in-line with the lower earnings recorded during the quarter. This translates to a dividend payout of 86.7% in comparison with 112.1% in 1QFY18. Cumulative 1HFY19 dividend amounted to 3.1sen as compared to 1FHY18 dividend of 4.8sen.

Impact on earnings. We are reducing FY19 and FY20 earnings forecasts lower to RM194.1m and RM218.9m to be on the conservative end after adjusting downward the contribution primarily from the RF segment.

Target Price. We are revising our target price to RM1.41 (previously RM1.79). This is premised on FY20 EPS of 6.7sen pegged to unchanged forward PER of 21x. Our target PER is based on its five year historical high rolling PER.

Maintain NEUTRAL. The group is facing challenges in the demand of its RF product mainly due to the lower demand of its major customer product. In the near term, we expect the challenges will not alleviate anytime soon as we view that the demand of the flagship smartphone of the group’s customer to remain weak. Fortunately, the optoelectronic segment shows resilience.

Source: MIDF Research - 22 Feb 2019