INVESTMENT HIGHLIGHTS

• Lower demand, changes in product mix and higher depreciation charges lead to -38.4%yoy contraction in 3QFY19 normalised earnings

• Cumulative 9MFY19 normalised earnings of RM149.8m came in within our expectation

• 9MFY19 dividend reduced to 4.1sen in line with the weaker cash generating capability

• Maintain NEUTRAL with an unchanged target price of RM1.41

Weaker 3QFY19 normalised earnings. Inari Amertron Bhd’s (Inari) 3QFY19 normalised earnings reduced to RM41.3m (-38.4%yoy). This was mainly attributable to lower revenue (-21.3%yoy), changes in product mix and higher depreciation cost. Note that the 3QFY19 revenue declined to RM256.3m due to lower volume loading on a major sensor product and loss of contribution post the disposal of its 51% stake in Ceedtec.

In-line with our expectation. In view of the weaker 3QFY19 financial performance, 9MFY19 normalised earnings amounted to RM149.8m (- 23.9%yoy). All in, the group’s 9MFY19 financial performance meets ours but below consensus expectations, accounting for 77.2% and 67.5% of full year FY19 earnings forecasts respectively.

Dividend. Inari announced lower 3QFY19 dividend of 1.0sen (3QFY18: 1.6sen), in-line with the lower earnings recorded during the quarter. This translated to a dividend payout of 83.3% in comparison with 90.9% in 3QFY18. Cumulative 9MFY19 dividend amounted to 4.1sen as compared to 9MFY18 dividend of 6.4sen. In view of this we are reducing our FY19 and FY20 dividend assumption to 5.5sen and 6.0sen respectively.

Target Price. We are maintaining our target price of RM1.41. 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.

Source: MIDF Research - 24 May 2019