We came away from the recent meeting with management still feeling NEUTRAL on its prospects as we believe the decent sales in the HDD segment will continue to be negated by the lacklustre demand from its Camera segment. While its foray into the Smartphone segment could turn around the group’s fortune, this will not be an immediate re-rating catalyst given its infancy stage. On the currency front, the group, being an export player with 80% revenue quoted in USD, will not benefit from the weakening MYR vs USD over the near-term as its unfavourable currency hedging will only expire by mid-2015. All in, we believe any light at the end of the tunnel could only be seen in FY16. Although its valuation has bottomed-out, trading at 0.4x FY15 PBV which is at its trough valuation in the past 3 year, we maintain our MARKET PERFORM call with no immediate re-rating catalysts in sight. TP remained unchanged at RM0.46 (at 0.4x forward PBV).

HDD to be the main earnings driver in FY15. Although the global HDD shipment will likely remain flat till 2018 (according to the forecast of IDC), the total Exabyte (unit byte for digital information) are forecasted to be on the uptrend with high bulk storage being the growth driver going forward. Taking a cue on this, management is positive on its HDD business as the group’s key product- Antidisc (80% of HDD revenue) which skewed towards the Enterprise segment, is the crucial component for the high bulk storage. Meanwhile on the product replacement risk from SSD, management noted that it will not be an imminent threat to the HDD sector given its persistent high cost per Gigabyte (still 5-10x more costly than HDD depending on the inches). Touching base on the organic revenue expansion, management highlighted that it has recently approached another vendor of world-renowned HDD makers to expand its market share. Should this catalyst materialises, the group believes its HDD revenue could register a robust 3-year CAGR of minimum 10%.

Headwinds persist in its Camera segment. Management is still cautious on the SLR demand in light of the muted consumer spending as well as the high base effect that was built during the previous demand boom for the SLR (amidst the migration from Analogue to Digital camera). Meanwhile, margins are also deteriorating given the shift of its business model to high-variety-lowvolume manufacturing in light of the stiff competition (of which operational efficiency is the key challenge). As a mitigation step, the group had allocated parts of its capacity to cater for the resilient HDD business.

Mixed bags in Smartphone segment. On its foray into the smartphone glass manufacturing, management noted that it is still at the R&D phase, ironing out some glass tempering issues. Meanwhile, on the online smartphone-selling business (by sourcing mid-end models phones from Chinese Smartphone players with own-brands labelling; minimal capex are required), management noted that it is ready to kick start anytime soon. Management is targeting to sell 50,000 phones at the first year of launching, with hopes to reap in midsingle digit bottomline margins. Note that we have yet to impute any earnings forecasts on this segment given the scarcity of details.

Not benefitting from the current weakening MYR vs USD trend. While a stronger appreciation of the USD will typically benefits exporter’s profitability given their export-oriented earnings profile in USD, management mentioned that the group is not gaining from the trend due to unfavourable currency hedging position at RM3.20/USD, to expire in mid-2015. Still in transition period. While we have great respect for the management’s transformation effort, we believe any light at the end of the tunnel could only be seen in FY16. We maintain our FY15E-FY16E earnings estimates for now with an unchanged TP of RM0.46. Maintain MARKET PERFORM. 

Source: Kenanga