KEY INVESTMENT HIGHLIGHTS

• The group recorded 1QFY20 sequential earnings recovery of +33.2%qoq to RM46.0m, in-line with our expectation

• Higher volume loadings registered, especially for the radio frequency (RF) products

• However, demand for optoelectronics yet to rebound

• Valuation appears stretched at this juncture, while prospective dividend yield to be below four percent

• Maintain Neutral with a revised TP of RM1.80

Sequential improvement in earnings. Inari Amertron Bhd’s (Inari) 1QFY20 normalised earnings contracted by -11.3%yoy to RM46.0m. On a sequential basis, the company recorded a +32.5%qoq rebound in earnings. This was premised on higher volume loading, especially for its RF products and decrease in deferred taxation. As a result, 1QFY20 profit margin improved to 14.5% from 12.8% as at 4QFY19.

In-line with expectation. All in, the group’s 1QFY20 normalised earnings came in within ours but below consensus expectations, accounting for 21.0% and 19.5% of full year FY20 earnings estimates respectively.

Dividend. The group announced lower 1QFY20 dividend of 1.3sen as compared to 1QFY19 dividend of 1.6sen. However, the dividend payout rate increased to 86.6% from 83.8% comparatively.

Impact to earnings. While we made no changes to FY20 earnings, we are revising FY21 earnings upwards to RM264.8m. The earnings upgrade mainly stems from the RF and fibre businesses, in-line with the advent of 5G. Note that the smartphone market is in a race to introduce 5G smartphone. The recovery in the group’s business activity is supported by the increasing number of RF testers at its plant.

Target Price. We are rolling forward our valuation based year to FY21 and derive a new target price of RM1.80 (previously RM1.41). This is premised on FY21 EPS of 8.2sen pegged to forward PER of 22.0x which is one standard deviation above its two-year average. We view that the premium is warranted, given its better earnings quality as compared to its peers.

Maintain NEUTRAL. The latest quarterly earnings suggest that there is revival in the demand of its RF products. We expect RF production volume to remain on the trend. This is premised on an increase in global smartphone volume next year as well as the introduction of more 5G smartphones with higher chip complexity, especially from the top-tier smartphone manufacturers. Nonetheless, there remains a concern on the optoelectronics segment.

Source: MIDF Research - 27 Nov 2019