INVESTMENT HIGHLIGHTS

• FY19 normalised earnings contracted by -23.2%yoy to RM184.5m, in-line with our expectation

• Weaker earnings was caused by lower demand, changes in product mix and higher depreciation charges

• Lower FY19 dividend of 5.2sen (vs FY20: 8.4sen) in-tandem with the weaker earnings

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

Profit margin improvement. Inari Amertron Bhd’s (Inari) 4QFY19 normalised earnings improved by +57.7%yoy to RM34.8m. This was mainly due to the improvement in the group’s profit margin 12.8% from 7.3% a year ago. Note that the revenue declined by -10.1%yoy to RM270.7m due to the lower volume loading and changes in product mix.

In-line with expectations. Cumulatively, FY19 normalised earnings amounted to RM184.5m (-23.2%yoy). The earnings was impacted by the decrease in demand of factory output, changes in product mix and higher depreciation cost. All in, the group’s FY19 financial performance meets ours but below consensus expectations, accounting for 95.1% and 91.9% of full year FY19 earnings forecasts respectively.

Dividend. Inari announced lower 4QFY19 dividend of 1.1sen (4QFY18: 2.0sen), in-line with the lower earnings recorded during the quarter. This translates to a dividend payout of 92.4% in comparison with 111.1% in 4QFY18. Cumulative FY19 dividend amounted to 5.2sen as compared to FY18 dividend of 8.4sen.

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. Meanwhile, to compensate for the lower production activities, the group is working towards implementing industry 4.0 to improve efficiencies. This will help to manage costs and profit margin. On a longer term horizon, we remain confident on the group’s ability to win new projects which would further diversify its earnings base and thus, reduce group’s dependency on its wireless RF segment. In addition, we view that the expected dividend yield of more than four percent will keep investor’s interest in the stock. All factors considered, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 29 Aug 2019