KEY INVESTMENT HIGHLIGHTS

• Lower 2QFY20 normalised earnings of RM39.6m due to lower contribution from the optoelectronic segment

• 1HFY20 normalised earnings of RM86.4m (-20.5%yoy) failed to kept pace with ours and consensus expectations

• Expecting temporary earnings setback in view of the Covid- 19 outbreak

• Nonetheless, concern on the optoelectronic segment to persist in the foreseeable term

• Maintain Neutral with a revised TP of RM1.54

Sequential contraction in earnings. Inari Amertron Bhd’s (Inari) 2QFY20 normalised earnings contracted by -30.2%yoy to RM39.6m. This was mainly due to reduced sales volumes in the group’s optoelectronic products.

Below expectation. Cumulatively, 1HFY20 normalised earnings amounted to RM86.4m, a decline of -20.5%yoy. This was in view of decreased demand of the factory output, changes in product mix and higher depreciation cost. All in, the group’s 1HFY20 financial performance came in below ours and consensus expectations, accounting for 39.5% and 40.7% of full year FY20 earnings estimates respectively.

Impact to earnings. We are reducing FY21 and FY22 earnings estimates to RM173.2m and RM226.8m respectively as we are factoring: i) lower contribution from the optoelectronic segment and ii) impact from the Covid-19 outbreak.

Target Price. Post our earnings downgrade, we are revising our target price of RM1.54 (previously RM1.80). This is premised on revised FY21 EPS of 7.0sen 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. We expect RF production volume to remain resilient. 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. However, we view that there could be temporary disruption caused by the Covid-19 outbreak. Meanwhile, we remain concern on the optoelectronics segment as seen in it’s the latest quarterly performance. The group is also advocating 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. All factors considered, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 26 Feb 2020