Results

JCY’s FY13 core net loss of RM79.5m came in below expectations when compared to HLIB and consensus’ full year core net loss of RM55.3m and RM72.2m respectively.

In 4QFY13, JCY registered revenue of RM414.4m (-22.8% yoy, +3.2% qoq), EBITDA of RM22.6m (-45.4% yoy, +7.0% qoq), and normalized PATAMI of –RM7.9m (>-100% yoy, - 46.1% qoq).

Deviations

Higher-than-expected cost base resulted in deteriorating EBITDA margin.

Dividend

None. YTD dividend is 1 sen per share declared on 26 Nov 2012 and paid on 10 Jan 2013.

Highlights

QoQ: Sales grew marginally due to the strengthening USD against MYR while ASP and volume shipment were flat.

YoY: Top line was the main culprit of the disappointing results as JCY blamed it on the compounded consequences of reduction in volume shipped and reduction of ASP.

Besides lower global demand for HDD, the contraction in sales orders was also due to resumption in operations by its competitors after the disastrous Thai flood.

Continuous operational efficiency has effectively sustained positive EBITDA margin at 5.0% level in 4Q13.

Customers continued to tightened their quality requirement and this has resulted in lower output yields elevating direct operating and material costs.

JCY raised concern that mechanical component supply chain is becoming competitive given the continued pressure on components pricing and possible over-capacity due to uncertainty over the total addressable market in the medium term.

Automation process will be pursued to minimize reliance on manual labors and continue to emphasis on productivity improvement which will lead to cost reduction.

Risks

• Weaker than expected consumer demand for HDDs;
• Higher raw material costs would lead to lower margins; and
• RM appreciation vs. USD.
• Shortage of labor and increasing labor costs.

Forecasts

Tweaked model according to deviations above which led to FY14-15 EPS revisions by -22.7% and -22.4% respectively.

Rating

SELL, TP: RM0.32

Positives - high adoption rate of cloud computing and demand for rich / high density media contents.

Negatives - Appreciating Ringgit, weak global demand in PC and SDD as substitute.

Valuation

Maintain our SELL call on the stock with a lower TP of RM0.32 (from RM0.37) based on FY14 P/E of 8.5x, the 2- year average P/E of US HDD brand manufacturers (see Figure #5).

Source: Hong Leong Investment Bank Research- 22 Nov 2013