Better results expected for Inari in first half of FY21

PETALING JAYA: Inari Amertron Bhd is expected to post better earnings in the first half of the financial year ending June 30, 2021 (FY21), stimulated by the launch of new smartphone and greater adoption of 5G phones, say analysts.

The outsourced assembly and test (OSAT) company had reported core earnings for the nine months of FY20 that were below analysts’ expectations, leading to a cut in earnings forecast for financial years 2020 to 2022.

Inari’s core earnings of Rm113.1mil for the nine months of FY2020 made up 64.2% of RHB Research and 68.1% of consensus fullyear forecasts.

According to RHB Research, the deviation was mainly due to lower margin as a result of a change in product mix and higher tax provision.

Overall, Inari’s weaker performance yearon-year (y-o-y) was caused by lower revenue, which fell 6.5% y-o-y.

As such, RHB Research has reduced Inari’s forecasts for FY2020 to FY2022 by 14% to 0.2%, to impute lower margin and higher effective tax rate assumptions.

“The strong share price run-up and weak set of results compel us to advocate a profit-taking strategy.

“Given the set of disappointing earnings and potential downward order revisions, there may be short-term weakness in the share price.

“While Inari stands to benefit from the multi-year growth trend from 5G technology, we advocate accumulation at a lower level,” said RHB Research.

It added that Inari iwas currently fairly traded at a three-year mean price-earnings ratio of 21 times.

Meanwhile, Hong Leong Investment Bank (HLIB) Research has cut Inari’s forecasted bottom line for FY2020 to FY2022 by 33%, 3% and 3%, respectively, after lowering sales and margin assumptions.

“While we are hopeful that it will recover in the first half of FY2021, stimulated by the launch of new blockbuster smartphones, the threat of its radio frequency product being substituted by end-to-end modem-radio Frequency Front End (Rffe)-antenna solution lingers on,” said HLIB Research.

Inari registered an 8.2% year-on-year dip in net profit of Rm35.06mil during the third quarter of FY2020.

Net profit for the nine months amounted to Rm120.28mil, which declined 21.6% as compared to the same period last year, mainly attributed to lower order loading leading to weaker earnings before interest, tax, depreciation and amortisation (Ebitda) margin as economies of scale diminish.

Inari experienced lower sales volume in optoelectronics products as well as a change in product mix and higher depreciation costs during the third quarter.

These were compounded by China,

Malaysia, and Philippines operations affected by the movement control order (MCO) and lockdowns.

However, this was cushioned by favourable foreign exchange rates at 4.206, as compared to the second quarter of FY2020’S rates of 4.164.

The group declared a third interim dividend of one sen per share.

Going forward, Inari remains cautious on prospects for the year in view of the current unprecedented pandemic situation.

The management will strive to maintain and improve utilisation of existing capacity while implementing cost control measures.

RHB Research expects Inari’s loading factors to improve in subsequent quarters, in anticipation of the new product launch from its end-customer and should 5G phone models be made available.

However, the research house cautioned that there would be some short-term impact on operations arising from regulatory controls and Covid-19 pandemic preventive measures.

HLIB meanwhile has upgraded the stock to a “hold” from a “sell” after its share price has retraced 26% since the research firm’s last downgrade in November last year.

Inari’s third interim single tier dividend of one sen per share (3QFY19: one sen), goes ex on June 15.

Year-to-date dividend amounted to 3.3 sen per share versus 9MFY19’S 4.1 sen.