Below expectations. When annualized, JCY's 9MFY12 core earnings came in below our and consensus expectations by 5%-15%. Its 3QFY12 revenue was flat at -0.6% q-o-q (+45% y-o-y) but core earnings fell significantly by 35.5% q-o-q (+ >100% y-o-y). The subpar performance could be due to the moderate industry HDD shipment (+7% q-o-q, -5.5% y-o-y) being offset by the decline in ASP of approx 4%-5% during the quarter. On the other hand, bottom-line was crimped by higher labour cost (due to higher minimum wage imposed in Thailand from 1 April onwards) and also the higher cost arising from ramping up production. This explains the decline in EBITDA margin by 10% q-o-q as well.

Flat shipment guidance from HDD players. We are turning cautious on the HDD sector as both Western Digital and Seagate are guiding for flat HDD shipments numbers in 3QCY12. Also, PC shipments are expected to experience only marginal growth in the 2H given that end-consumers may divert their spending to Microsoft Surface, iPad mini and iPhone 5 instead.

3rd interim dividend of 3 sen. Cumulatively, JCY had already declared a total YTD dividend of 8 sen, translating to a dividend payout ratio (DPR) of 38%. This is in-line with our conservative 40% DPR assumption. We expect the company to declare another 2-3 sen as final dividend next quarter.

Revision to forecasts. We are revising downwards our FY12/FY13 earnings forecasts by 12.2%/5.2% respectively to realign with our estimates to factor in the weaker financial performance of its 3QFY12 results. Furthermore, we foresee ASPs to decline at a quicker pace along with tepid industry HDD shipment volume.

Maintain NEUTRAL with revised FV of RM1.44. Despite the negative outlook, at current market price, JCY still offers an attractive dividend yield of 6%-7%. This is given the fact that its financial numbers in FY13 should still be significantly better compared to pre-Thai floods level. However, we foresee that it will decline on a y-o-y basis against FY12. Factoring all these in, we derived a new FV of RM1.44, based on 6.4x FY13 PE. We maintain our NEUTRAL recommendation on the stock.

Source: OSK