KEY INVESTMENT HIGHLIGHTS

• Lower volume loadings led to contraction in 4QFY20 normalised earnings of RM31.8m (-17.3%yoy)

• Full year FY20 normalised earnings of RM152.3m (-20.6%yoy) came in within our expectation

• Strategic 5G positioning and active effort to diversify revenue base to sustain earnings growth

• Stretched valuation as the current PER go above 30x which signifies that positivity has been priced-in

• Maintain Neutral with a revised TP of RM2.05

Decline in volume loadings. Inari Amertron Bhd’s (Inari) 4QFY20 normalised earnings contracted by -17.3%yoy to RM31.8m. The decline in normalised earnings was brought about by lower volume loadings as 4QFY20 revenue declined to RM233.3 (-13.8%yoy).

In-line with expectation. Cumulatively FY20 normalised earnings amounted to RM152.3m, a decrease of -20.9%yoy. This was mainly attributable to decrease in demand of optoelectronic products, lower production volume, changes in product mix and higher depreciation cost. All in, the group’s FY20 financial performance came in within our expectation.

Dividend. In-line with the weaker FY20 performance, full year FY20 dividend amounted to 4.4sen as compared to 5.2sen announced for FY19. This is close to our FY20 dividend estimates of 4.3sen.

Impact to earnings. We made no changes to our earnings estimates at this juncture.

Target Price. We are rolling forward our valuation base year to FY22 and derive a new target price of RM2.05 (previously RM1.36). This is premised on pegging FY22 EPS of 7.4sen against forward PER of 27.7x. Our target PER is the group’s +2SD above the two years historical average of 20.7x. The premium valuation reflects the group’s strategic positioning for the emerging 5G technology as well as aggressive efforts to diversify its revenue base.

Maintain NEUTRAL. The group experienced a double digit decline in FY20 earnings in line with our expectation. Moving forward, as the impact of Covid-19 dissipates, we view that the group’s volume loadings would improve greatly. In addition, we favour the group’s strategic 5G positioning as well as the active efforts to diversify its revenue base. The latter can be seen in the recent joint venture effort with MIT Semiconductor Pte Ltd to supply customised semiconductor process tools. Meanwhile, we also expect profit margin to improve arising from various measures to control costs and capex. Nonetheless, we view that the stretched valuation of more than 30x signifies that much of the positivity has been priced in. All factors considered, we are maintaining our NEUTRAL recommendation on the stock

Source: MIDF Research - 28 Aug 2020