FW: Results: Inari Amertron (BUY; TP: MYR2.70), PECCA Group (HOLD; TP: MYR1.60)

 

Inari Amertron (INRI MK; BUY; TP: MYR2.70) - Six consecutive years of earning growth

 

• Within expectations. Inari’s FY6/17 core net profit of MYR206m came in within our and consensus expectations at 96%/103%. FY17 headline net profit included a gain of MYR20m from the disposal of PCL Technologies (4977 TT; Not Rated) shares. Our FY18-19 earnings forecasts are unchanged pending an analyst briefing today. Our MYR2.70 TP is pegged on unchanged 20x CY18 PER (10% premium to our target PER peg for Malaysian listed technology companies within our coverage for its superior visibility). Maintain BUY.
• Tell-tale signs of sustained forward growth. An all-time high revenue of MYR346m (+26% QoQ, +34% YoY) in 4QFY17, underpinned by (i) seasonal strength in RF demand and (ii) a full quarter contribution of the IR LED, did not flow fully to bottomline mainly due to higher depreciation of MYR21m (+32% QoQ); 4QFY17 capex accounted for 42% of total capex of MYR121m for FY17 – a likely indication of production ramp up in the upcoming quarters.
• Commendably, FY17 core net profit (+33% YoY) grew faster than revenue growth (+13% YoY) as core EBIT margins expanded 4.4ppts, on favourable sales mix from higher contribution from the RF division as well as new ventures (i.e. multi-signal traffic controllers, IR LED). Solid results and cash flow generation (net cash of MYR412m as at end FY17) empowered Inari to pay out a total of MYR163m (8.3sen/share) as dividends for FY17, representing a DPR of 72% - within expectations.
• To further extend growth streak? Based on a quarterly run-rate of MYR346m, this implies that Inari could achieve an annualised revenue of MYR1.4b in FY18 (+18% YoY). We, however, believe that Inari could grow beyond its current run-rate on faster adoption of the iris scanner in next year’s smartphone launches; recall that the IR LED is a component for the iris scanner module.

 

PECCA Group (PECCA MK; HOLD; TP: MYR1.60) - Closing FY17 on a softer tone

 

• Below expectations. FY6/17 core net profit of MYR14.7m (-11% YoY) met only 93% of our and consensus’ full-year estimates. Despite 4QFY17’s strong QoQ revenue rebound (+27% QoQ), unusually high taxes hindered earnings recovery to previous levels. We lower our FY18-19 net profit forecasts by 5%-8% on higher tax rates and opex forecasts mainly from usage of outsourced labour; we also introduce our FY20 earnings forecast. Maintain HOLD with a lower TP of MYR1.60 (-6%), pegged on unchanged 14.5x CY18 EPS (20% premium to peers valuation).
• Impacted by higher taxes. Despite a 33% QoQ recovery in 4QFY17 net profit (on the back of a 27% growth in revenue), earnings still fell short due to higher-than-expected taxes; historically, Pecca was able to hit a net profit ~MYR4m when it achieved a revenue of MYR31m-32m. The higher taxes was due to adjustments made for deferred tax allowance for its capex.
• For FY17, the key underperformance came from the PDI and OEM divisions (revenue -18% YoY, -9% YoY respectively) whereby the former was hit by slow Nissan sales (Nissan is a key customer of Pecca’s SmartFit car seat covers) while the latter was affected by a shortfall in production at Perodua due to an unexpected facelift of the Bezza model. Despite the negatives, cash flow generation remains healthy [MYR93m net cash end-FY17 (one-third of market cap)] which allowed for higher DPS of 5sen (+25% YoY); a 3sen second interm DPS was declared.
• Growth to resume in FY18. We believe that growth should resume in FY18, driven by the OEM division on higher volume coming from the launch of the new Perodua Myvi in 4QCY17 (see our assumptions in table overleaf). Furthermore, a gradual recovery in the MYR against USD is beneficial to Pecca whose leather costs (65% of COGS) are mostly denominated in USD.