Review

• Excluding gain on disposal of assets by Ceedtec Sdn Bhd, a 51%-owned subsidiary, Inari Amertron’s FY19 core net profit of RM190.1mn (-17.5%) came slightly below ours and consensus estimates at 94.3% and 94.7% respectively. The miss was due to higher-than-expected tax rates in 4QFY19, which expanded 13.2pp QoQ and 4.3pp YoY to 22.2% due to provision for deferred taxation of ~RM5mn. Revenue and PBT however were in line, accounting for 99.7% and 98.7% of our estimates.

• A fourth interim dividend of 1.1sen/share was declared. YTD’s of 5.2sen/share (-23.5%) represents a payout ratio of 86.7%.

• YoY. FY19’s revenue declined 16.2% YoY to RM1,152.9mn mainly due to softer volume loadings as well the absence of contributions from: 1) iris scanning (following product’s end of life) and 2) Ceedtec Sdn Bhd (assets disposed in FY18). Coupled with higher depreciation, core net profit declined 17.5% to RM190.1mn.

• QoQ. 4QFY19’s revenue recovered 5.6% QoQ to RM270.7mn mainly due to higher volume loadings, which we believe was driven by the group’s radio frequency segment. Core net profit however declined due to a 13.2pp QoQ spike in tax rates to 22.2%.

• Meanwhile, the group remained in healthy financial standing with a net cash position of RM414.8mn or 12.9sen/share (-3.0% QoQ, -18.1% YoY). The decline was mainly due to capex outlay and dividend payment.

Impact

• Our FY20/FY21 earnings are adjusted by -4.0%/-3.2% to RM244.3mn/RM322.5mn upon imputing FY19 year-end figures into our model and revising our tax rate assumptions higher from 8% to 10%. We also introduce our FY22 earnings forecast of RM368.0mn.

Outlook

• Beyond near-term challenges from subdued smartphone demand, we expect the group’s RF segment and fibre-optics business to benefit from the greater commercialisation of 5G, which is expected to open up a variety of new use cases. Meanwhile, backed by the group’s capabilities and established ties with multinationals, there are also prospects of securing outsourcing opportunities at its new plant (P34) in Batu Kawan, Penang which has enlarged overall capacity by ~68%.

Valuation

• 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 trade war, strengthening of the ringgit against the USD and surge in commodity prices.

Source: TA Research - 29 Aug 2019