Period     3Q13/9M13

Actual vs.  Expectations   A 3Q13 net loss of RM12.8m was reported, widening its 9MFY13 net losses to RM59.3m due to lacklustre demand for HDD and weaker operational efficiency. Hence, the result came in below our and the consensus full-year estimates. 

Dividends    No dividend was declared in the quarter review.

Key Result Highlights  YoY, the 9M13 revenue declined by 30.9% due to the lower ASP coupled with lower volumes shipped amidst the normalised shipment of orders after the initial high pent-up demand post the Thailand flood last year. Meanwhile, 9M13 EBIT plunged into a loss of RM56.9m, in conjunction with the lower revenue recorded and higher operating cost. 

QoQ, the 3Q13 revenue inched up marginally by 0.1% on the back of higher shipments and almost equally offset by unfavourable exchange rates of USD against RM. At the PATAMI level, the group netted in a narrower loss of RM12.8m (compared to RM20.8m), cushioned by improvement in operating efficiency, which resulted in better absorption rate of fixed costs.

Outlook    The HDD industry is expected to be overshadowed by the lacklustre PC demand amidst global economic uncertainties as well as consumer’s preference towards smart gadgets, which does not require HDD component. In addition, the implementation of the minimum wage policy in Malaysia would also claw into profitability.

Change to Forecasts      We have slashed our FY13E-FY14E net profits by more than 100% and 12%, respectively, to -RM68.3m and RM153.8m to account mainly for lower utilisation rates and gross profit margin (mainly to factor in the higher cost of sales). We have also cut our FY13 dividend assumption to 1.0 sen (from 2.0 sen previously).

Rating  Maintain UNDERPERFORM.

Valuation     We have downgraded our target price to RM0.50 (from RM0.54) in conjunction with the revision in earnings estimates. 

Our new TP of RM0.50 is based on a 0.9x FY14 BVPS which represents -1SD level below the 3-year average forward PBV.

Risks    Unfavourable foreign currency exchange rate.

Industry recovery may falter halfway.

Lower orders from HDD customers.

Source: Kenanga