Period     2QFY13/6MFY13

Actual vs.  Expectations   The group reported a 2QFY13 net loss of - RM20.8m, widening its 1HFY13 net losses to RM46.5m. The main culprits that deviated expectations were the lower revenue and higher cost of sales. As a result, its earnings came in below ours and the consensus full year estimates. 

Dividends    No dividend was declared in the quarter review.

Key Result Highlights   YoY, the 1HFY13 revenue declined by 31.5% due to lower volumes shipped amid the normalised shipment of orders in the 1HFY13 after the initial high pent-up demand post the Thai flood last year coupled with a lower ASP. Meanwhile, at the group’s EBIT level, the 1HFY13 EBIT saw a loss of 44.8m, dragged down by the lower revenue amid a reduction in the global demand for HDD and higher operating cost caused by a higher cost of sales. 

QoQ, the 2QFY13 revenue improved by 6.5% on the back of higher shipments and a favourable exchange rate of USD against RM. At the PATAMI level, the group netted in a narrower loss of RM20.8m (compared to RM25.7m), cushioned by improvement in operating efficiency coupled with forex gain on the revaluation of its financial assets and liabilities. 

Outlook    The lacklustre PC demand amid the global economic uncertainties and the consumer’s preference towards smart gadgets could continue to suppress the revenue growth of the group (as the group’s core business of HDD manufacturing is heavily dependent on PC sales). The implementation of the minimum wage policy in Malaysia could also further dampen the group’s future earnings.

Change to Forecasts      We have slashed our FY13-FY14E net profits by 80%-14% to account for a lower gross profit margin assumption (mainly to factor in the higher cost of sales). We have also cut our FY13 dividend assumption to 2.0 sen (from 4.0 sen).

Rating  Maintain UNDERPERFORM.

Valuation     We have downgraded our target price to RM0.54 (from RM0.58) as we rolled over our 12-month TP valuation from 1.0x FY13 BVPS to 0.9x FY14 BVPS (represents -1SD level below the 3-year average forward PBV).

Risks    Foreign currency exchange rate.

Industry recovery may falter halfway.

Lower orders from HDD customers.

Source: Kenanga