Wednesday, May 17, 2017

Inari Amertron (INRI MK; BUY; TP: MYR2.45) - Beats street’s expectations

Inari Amertron (INRI MK; BUY; TP: MYR2.45) - Beats street’s expectations
  • Within our expectations but beat street’s. Inari’s 9MFY6/17 core net profit of MYR157m came in within our street-high FY17 core net profit forecast at 73% but beat Bloomberg consensus’ at 80%. We make minor changes (+>2%) to our FY18/19 earnings forecasts, having incorporated a higher USD/MYR forex rate of 4.30. We now peg Inari to 18x CY18 PER (from 16.5x; +2SD) on FD EPS of 13.5sen, deriving a higher MYR2.45 TP (+12%). This re-rating is justifiable considering Inari’s sector bellwether status and superior valuations matrix (low PEG, high yield) with firm near-term strong growth; BUY.
  • Rising prominence of the non-RF divisions. 3QFY17 core net profit of MYR47m (-27% QoQ, +119% YoY) took 9MFY17 core net profit to MYR157m (+45% YoY), beating consensus’ expectations for two quarters in a row. 3QFY17 headline net profit included MYR4.1m gain from disposal of shares in PCL Technologies (4977 TT, Not-Rated). Despite seasonal weakness, 3QFY17 revenue was flattish QoQ (+26% YoY) while operating margins normalized to 18.4% (-5.7ppts QoQ) in absence of large forex gains in 2QFY17 (USD/MYR: -1% QoQ to USD1/MYR4.43 at end-3QFY17). Operationally, we believe that seasonal weakness in the RF division was offset by stronger performance in the P-13 and P-21 plants which have ramped up production for fiber chip and IR LED components.
  • Compelling earnings visibility ahead. We expect demand to pick up in 4QFY17 for the RF division leading up to the launch of two major premium smartphone in 3QCY17. The likely adoption of iris scanner in one of the premium smartphones to be launched would likely see Inari ramping up production of its IR LED, a necessary component for the iris scanner, over the next 3 quarters.  Positive response for the iris scanner, featured in the new Samsung Galaxy S8, could see further adoption by other smartphone brands in future launches, which could well be another long-term catalyst to Inari.
  • Positive surprise in dividends. A third higher interim of 2.2sen (vs. 1.8sen in 2QFY17, 1.5sen in 1QFY17 adjusted for bonus issue), to go ex on 6 Jun 2017, took 9MFY17 DPS to 5.5sen, beating our initial full-year forecast of 4.6sen. 9MFY17’s payout amounted to 66%. We now expect Inari to pay out 75% of its earnings vs. 55% previously, and have adjusted our dividend forecasts accordingly.
  • Premium valuations justified by superior matrix. Inari has been a laggard YTD in terms of share price performance in comparison to the other local semiconductor peers despite consistently beating in terms of earnings expectations. We believe that its sector bellwether status, coupled with superior valuations matrix, warrant a higher valuation compared to its peers. At 24% 3-year forward earnings CAGR, Inari stands tall above its peers with the exception to Globetronics, but which is due to a low base as its net profit plunge by 64% to MYR26m in 2016 (from MYR71m). Inari’s superior ROEs (30+%) and yields (~4%) also support a higher valuation multiple peg. For these, we believe that Inari deserves to trade at 18x CY18 PER which is +2SD above its mean and 23% above average peers.

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