Inari held a briefing following the release of its 4QFY19 results. Key takeaways include: 1) management remains positive on the group’s prospects with its core RF and fibre businesses expected to benefit from 5G, 2) other divisions & new projects continue to gain traction, and 3) 1 of the 3 blocks at the recently completed P34 has been designated to the group’s major customer which is to begin with housing RF assembly. In all, we maintain our forecast and reiterate our Buy recommendation on Inari with a TP of RM2.05/share based on a PE of 23.0x CY20 EPS.

FY19: Lower Volume Loadings Seen Across All Products

To recap, FY19’s revenue and net profit declined 16.2% and 17.5% to RM1,152.9mn and RM190.1mn due to lower volume loadings and the absence of contributions from Ceedtec (assets disposed in FY18). Management alluded that if excluding Ceedtec’s contributions of RM64.9mn in FY18, the decline in revenue would be softer at 12.1%. Weakness was observed across all products with revenue from the generic, radio frequency (RF), and fibre and optoelectronics down 26%, 20%, and 10%.

Bread & Butter Businesses Poised for Further Growth

Looking ahead, management remains positive on the group’s prospects with its core RF and fibre businesses expected to benefit from 5G. In fact, in the lead up to the upcoming launch of a major flagship smartphone, we note that utilisation rates at the radio frequency segment had picked up 5pp QoQ to 60% during 4QFY19 with the momentum carrying on thus far into 1QFY20. Notwithstanding slowing smartphone sales, the group is expected to benefit from growing RF content per device. Also encouraging, with the group’s major customer continuing to consign more RF testers, capacity at plant P13B is expected to be filled up by December 2019 and in view of this, the group has plans to construct plant P13C (adjacent to plant P13B) in anticipation of further ramp up down the road.

Other Divisions & New Projects Continue to Gain Traction

Meanwhile, management also highlighted on continued traction with its other businesses. Among others, the mixed signal testing is viewed as a rising star with 70 testers (vs 56 testers in April 2018) installed and an increasing number of programs being worked on. As for new projects, while activity for MiniLED remains stalled due to the trade war, that for the health sensor and 3D facial recognition has been progressing well.

P34: 1 of 3 Blocks Has Been Designated to a Major Customer

For the group’s recently completed plant P34, we note that backbone facilities (e.g., utilities) are being fitted and thus far, 1 of the 3 blocks has been designated to its major customer, which is to begin with housing RF assembly. As it is SMT lines are being set-up at the plant in phases and expected to commission in 2020. In the meantime, management is still in discussion with prospective customers for outsourcing opportunities at the remaining blocks.

Valuation & Recommendation

In all, we value Inari at TP of RM2.05/share based on 23.0x CY20 EPS, which is +0.5SD to the stock’s 5-year mean. We opine the premium is justified by its capabilities and relevance of products towards emerging technologies, above industry average margins, and robust balance sheet. Reiterate BUY. Key downside risks include heightened global trade tensions and a strengthening of the ringgit against the USD.

Source: TA Research - 30 Aug 2019