KEY INVESTMENT HIGHLIGHTS

• Lower 3QFY20 normalised earnings of RM22.4m (-45.7%yoy) due to quieter production activities

• 9MFY20 normalised earnings of RM109.0m (-27.2%yoy) failed to kept pace with ours and consensus expectations

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

• 9MFY20 cumulative dividend remained commendable at 3.3sen despite being in a cash preservation mode

• Maintain Neutral with a revised TP of RM1.54

Quieter production activities due to lockdown. Inari Amertron Bhd’s (Inari) 3QFY20 normalised earnings contracted by -45.7%yoy to RM22.4m. This was mainly attributable to: i) lower sales volume in optoelectronic products, and ii) lower production volume at its Malaysia, China and Philippines plants which resulted from enforcement of lockdowns by the respective Governments. The decline was further exacerbated by higher depreciation charges and higher tax provision.

Below expectation. Cumulatively, 9MFY20 normalised earnings amounted to RM109.0m, a decline of -27.2%yoy. This came in below ours and consensus expectations, accounting for 62.9% and 65.6% of full year FY20 earnings estimates respectively.

Dividend. The group maintained 3QFY20 dividend payout at 1sen in comparison to 3QFY19. Nonetheless, this lead to cumulative 9MFY20 dividendd of 3.3sen (vs 9MFY19: 4.1sen), in tandem with the weaker financial performance.

Impact to earnings. We are reducing FY20/21/22 earnings estimate to RM155.1m/RM202.2m/RM240.5m respectively as we are factoring: i) lower contribution from the optoelectronic segment and ii) slower production activities.

Target Price. Post our earnings downgrade, we are revising our target price of RM1.36 (previously RM1.54). This is premised on revised FY21 EPS of 6.2sen pegged to forward PER of 22.0x which is one standard deviation above its two-year average.

Maintain NEUTRAL. Generally, we expect production activities to remain tepid owing to the Covid19 pandemic. Coupled with the change in product mix, we expect the profit margin to trend lower as compared to its historical track record. To partial mitigate this issue, the company is placing more emphasis on cost control and optimizing its capital spending. This has led to healthier cash reserve which would place the group in a favourable position should there be a clear sign of turnaround. We view that any positive development would start to be seen towards the end of CY20. In addition, the group remain committed in declaring dividend, albeit smaller quantum. Given the lack of rerating catalyst at this juncture, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 22 May 2020