Review

• Inari’s 1QFY20 core net profit of RM48.0mn (+30.2% QoQ, -16.0% YoY) accounted for 19.4% and 20.3% of ours and consensus full-year estimates respectively. We deem this to be within expectations as we expect a stronger 2HFY20, driven by increased activity at the group’s core radio frequency (RF) and fibre-optics business on the back of greater commercialisation of 5G. Separately, a first interim dividend of 1.3sen/share (-18.8%) was declared, representing a payout ratio of 86.2%.

• YoY. 1QFY20’s net profit declined 16.0% to RM48.0mn mainly due to lower volume loadings at the RF business as well as higher depreciation and taxation. Revenue declined 2.8% to RM316.6mn.

• QoQ. 1QFY20’s revenue and net profit increased 17.0% and 30.2% to RM316.6mn and RM48.0mn. This was mainly due to stronger volume loadings at the RF business in the lead up to a major end-customer’s new smartphone line up. Besides, lower taxation also contributed to the bottom-line improvement as it led core net profit margin higher 1.5pp to 15.1%. Despite the trend of slowing smartphone unit sales globally, we believe the group had benefitted from growing RF content per device to support an increasing range of frequency bands.

• Meanwhile, the group’s balance sheet remained healthy with a net cash position of RM460.5mn or 14.5sen/share (+11.0% QoQ, -12.3% YoY).

Impact

• We maintain our earnings estimates.

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 further outsourcing opportunities at P34, its new plant in Batu Kawan, Penang which has enlarged overall capacity by ~68%. Thus far, 1 of the 3 blocks at P34 has been designated to a major customer with commissioning expected to begin in 2020.

Valuation & Recommendation

• We maintain our BUY recommendation on Inari with a TP of RM2.17/share based on 24.0x 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. Key downside risks include heightened global trade tensions, strengthening of the ringgit against the USD and surge in commodity prices.

Source: TA Research - 27 Nov 2019