Inari’s 6MFY20 core net profit was down 27% yoy largely due to lower opto revenues as a result of weakness in the sensor and automotive segments, higher depreciation charges and tax. However, RF revenues were up 18% yoy, a reflection of improved RF utilisation as a result of better demand for an end-customer’s phones and also increased chip complexity and density. We cut the FY20-22E EPS by 2-20% to factor in the weaker opto business and also to account for some delays in new production starts arising from the Covid-19 outbreak. Any pullback in the stock price will present a good buying opportunity, in our view. We lower our 12-month TP to RM1.80, but reaffirm our BUY call.

2QFY20 Earnings Weaker Sequentially

Inari’s 2QFY20 core profits was weaker sequentially, down 28% due to weakness in both its opto and RF segments (48% of FY19 revenue). We understand this was due to the continued decline in volumes for its sensor business as well as lower automotive related product volumes at its Philippine unit. On a positive note, the lower effective tax rate for the quarter at 12% vs. 13% in 1QFY20 highlights a favourable shift in product mix towards the newer non-discrete RF products.

6MFY20 Below Expectations

For 6MFY20, the core profit was weaker by 27% yoy. This was due to a combination of weaker revenue (-7% yoy), higher depreciation charges (+9% yoy) to reflect the completion of plant P34 as well as a higher effective tax rate due to changes in the product mix, in favour of older RF products which are no longer subject to favourable tax incentives. Results were below our expectations due to lower-than-expected revenue and margins.

Reaffirm BUY With Lower Target Price of RM1.80

We cut our FY20-22E earnings to account for the weak earnings and negative impact from Covid-19, and lower our target price to RM1.80, based on an unchanged target PE of 24x on the CY20E EPS. Nevertheless, we continue to project a FY19-22E EPS CAGR of 27%, on expectations of strong RF demand as 5G devices start to proliferate in the market. We reaffirm our BUY call. Downside risks: delay in 5G rollout, loss of customers, a sharp appreciation of the RM and weak demand for smartphones.

Source: Affin Hwang Research - 26 Feb 2020