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JCY International - Time to Let go

kiasutrader
Publish date: Thu, 22 Nov 2012, 10:33 AM

JCY's FY12 results  were  disappointing,  as  its  full-year  core  earnings  only  made up  83%/87%  of  our/consensus  forecasts.  The  shortfall  can  be  attributed  to  4Q's higher-than-expected  opex  (+13%  q-o-q,  +27%  y-o-y).  We  are  cutting  our  FY13 earnings  forecast  by  61%  as  we  see  rising  risk  of  thinning  profit  margins.  The weakening  global  HDD  outlook  is  also  casting  a  cloud  on  JCY.  Since  the  stocknow  lacks  rerating  catalysts,  it  is  no  longer  a  bargain  buy.  We  are  downgrading JCY to a SELL, with a new RM0.35 FV, based on the existing 4.5x FY13 PE.

Below expectations. Much to our surprise, JCY's FY12 financial results were far below expectations  '  its  full  year  core  earnings  only  represented  83%/87%  of  our/consensus forecasts. On the back of weaker HDD demand, its top-line had continued to decline to RM536.4m (-7% q-o-q, +22% y-o-y). However, the primary reason for the shortfall was the  higher-than-expected  opex  incurred in  4Q  (+13%  q-o-q,  +27%  y-o-y);  we  could not exactly  pinpoint  what  caused  the  steep  rise  given  limited  information  on  hand.  The EBITDA  margin  fell  to  6.9%  from  22.8%  in  the  preceding  quarter.  Ultimately,  its bottomline  sank  85%  q-o-q  to  RM15.4m  (-26%  y-o-y).  No  dividends  were  declared  for the quarter under review.

Headwinds swirl over HHD industry. We are turning even more cautious on the HDD sector as Western Digital and Seagate have guided their4QCY12 revenues to contract by 7%-13% q-o-q, given: i) a flat total addressable market target of 140m units, coupled with  ii)  a  continuous  erosion  in  average  selling  prices  (ASP).  Their  gross  margins  are expected to compress by 1%-2% from 3QCY12.

Downgrade  to  SELL,  FV  revised  to  RM0.35.  We  are  revising  downwards  our  FY13 earnings forecast by 61% as there is an increased risk in the tapering profit margin. The weaker  outlook  of  the  global HDD industry  also  does  not  bode  well  for  JCY.  Thus,  the stock now lacks rerating catalysts and is no longer justifiable as a bargain buy. We are downgrading  the  company  to  a  SELL  and  trimming  the  FV  to  RM0.35  based  on  the same  valuation  multiple  of  4.5x  FY13  PE. We did not expect the company's profit margins  to  jump  off  the  cliff  so  quickly;  the  post-Thai  flood  business  boost  was  just  a one-off passing opportunity. Nonetheless, we are taking the opportunity to introduce our financial forecasts for FY14 in this report.
 Source: OSK
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