KUCHING: Inari Amertron Bhd (Inari) will likely report a weak set of earnings for the third quarter of the financial year 2016 (3QFY16) as inventory continues to be worn down and on concerns over a lacklustre new model later this year, analysts observed.
In a report, the research arm of Affin Hwang Investment Bank Bhd (Affin Hwang Capital) highlighted that a leading smartphone manufacturer recently reported that its smartphone sales declined for the first time since its launch nine years ago and has guided for weaker sales in the quarter ahead.
“This will likely have negative implications on Inari and we estimate that Inari’s revenue could fall by up to 30 per cent this quarter, taking into account the two per cent appreciation of the ringgit,” the research team opined.
It noted that the radio frequency (RF) business contributes nearly half of Inari’s revenue.
“Concerns over weak demand ahead arising from a lacklustre new model by this same brand later this year are also valid,” it added.
If the 3Q16 revenue declined, Affin Capital said Inari’s net profit for the quarter could be in the region of RM20 million to RM25 million based on an estimated net margin of 10 to 12 per cent.
“Although Inari reported a net margin of 14 per cent in 2QFY16, margins are likely to be lower considering the adverse impact of operating leverage.
“Cumulative first nine months of FY16 (9MFY16) net profit would thus be circa RM100 million, or 50 per cent of our FY16 estimate.
“While 4QFY16 is expected to be more robust in view of an anticipated order ramp up, matching our FY16E would be tough.
“We are thus lowering our revenue (cut by 17 per cent) and net margin assumption (reduced from 16 per cent to 14 per cent) resulting in a 27 per cent cut in FY16E earnings per share (EPS). We also cut FY17 to FY18 EPS by 30 per cent each year,” the research team projected.
Despite the cut in earnings expectations, Affin Capital remained positive on Inari’s long-term prospects and maintained its ‘buy’ rating on the stock.
It explained that it is positive on both Inari’s RF operations as well as on the fibre optics front.
“We believe LTE adoption will continue to raise RF content per device driving growth despite an overall slowdown in smartphone sales,” it opined.
It noted that key downside risks to its estimates include a slowdown in global demand for smart devices, rapid average selling price erosion and a loss of customer base.