JCY's 1QFY13 core loss of MYR33m  took  us  and  consensus  by  surprise.  The 
company  did  not  declare  a  dividend  for  the  quarter  under  review.  We  are  slashing 
our FY13/FY14 forecasts for MYR158m/MYR152m in core earnings to core losses of 
MYR83m/MYR71m respectively. We are also changing our valuation from 4.5x FY13 
PE to 0.7x CY13 P/NTA. Maintaining SELL, with our FV unchanged at MYR0.35.  

Seeing  red.  JCY's financial results were below expectations. Although  the company's 1QFY13  revenue  was  marginally  below our/consensus' full forecasts by about  5%/8%,  it registered  a  core  loss  of  MYR33m  versus  our/consensus'  estimates  for  core  earnings  of about  MYR40m/MYR53m  per  quarter.  Note  that  this  is  the  first  time  JCY,  which  had previously  reaped  the  benefits  of  a  sector  recovery  following  the  Thai  floods  in  1QFY12, has fallen into the red. More worrying is that its 1QFY13 revenue contracted by 30% q-o-q (-33%  y-o-y),  pulling  its  profit margins into  negative  territory  (EBITDA /PBT/core  earnings margins stood at 0%/-7%/-9% respectively). It did not declare a dividend for the quarter.

Hit  by  lower  shipments  &  ASP,  and  higher  COS.  In  its results announcement, JCY's management highlighted several points, including: i) a reduction in volume shipped, and ii) moderating  average  selling  prices  (ASPs)  of its products,  leading to  a  revenue  decline in 1QFY13. As for its profit decline, it said cost of sales (COS) went up due to tighter quality requirements from its customers, resulting in lower yields per output.

Maintain  SELL,  FV  unchanged  at  MYR0.35.  We  are  slashing  our  FY13/FY14  core earnings  forecasts  of  MYR158m/152m  to  a  core  loss  of  MYR83m/71m  respectively.  The longer term outlook for the HDD sector seems gloomy given the tepid demand for PCs as consumers  opt  for  electronic  gadgets  like  smartphones  and  tablets.  Also,  the  recent increases in minimum wage in Malaysia and Thailand had not been kind to JCY. That said, we  are  switching  our  valuation  from  a  4.5x  FY13  PE  to  0.7x  CY13  P/NTA,  based  on  the following updated forecasts: i) for a core loss in FY13-FY14, and ii) removing the earnings volatility  by  switching  to  a  valuation  based  on  balance  sheet  variables.  All  said,  we  are maintaining our SELL call on the stock, with an unchanged FV of MYR0.35.

 Source: OSK