Stock Name: JCY
Company Name: JCY INTERNATIONAL BERHAD
Research House: CIMB
JCY International Bhd
(Aug 17, RM1.18)
Maintain outperform at RM1.20 with target price RM2.28: We estimate that sales remained flat quarter-on-quarter (q-o-q) at RM552 million in 3QFY2010 though there is downside risk to our estimate given the q-o-q decline in volumes earlier reported by its two major HDD customers, Western Digital (-3%) and Seagate (-7%).
On a year-on-year basis, however, both drive makers still registered healthy double-digit growth of 24% and 15%, respectively. Other mitigating factors include maiden contributions from Seagate's top cover project and possible higher allocations from major customers.
We estimate that 3QFY2010 earnings before interest, tax, depreciation and amortisation (Ebitda) margin widened 20 basis points q-o-q to 17.4% on the back of better cost control. It had been hit by higher labour costs due to an increase in the number of contract workers in 2QFY2010.
However, the management has addressed this issue in May and this should have resulted in some improvement. But again, we see downside risk to our forecast due to slower sales and the negative impact of the weaker US dollar.
We expect JCY's guidance to be more muted this time in view of the uninspiring guidance from both WD and Seagate.
Its two HDD customers are projecting single-digit q-o-q volume growth in the coming quarter due to weakness in the European markets as well as higher inventory in the channel, which ended the June quarter at around five weeks against less than four weeks as at end-March. On a slightly positive note, JCY has started mass production of base plates for Hitachi and Samsung.
However, volume is unlikely to be significant this year. Also, we understand JCY is in active discussions with major customers for higher allocations to mitigate the current slower growth.
We leave our FY2010-12 profit forecasts unchanged ahead of the 3QFY2010 results and also retain our 'outperform' rating and target price of RM2.28. Our current target price of RM2.28 is based on 12 times CY2011 PER.
We believe the share price has already factored in the weak near-term outlook. JCY remains an 'outperform' as we believe it has the financial ability to weather the short-term weakness. We like its scale, which helps keep its returns consistently above industry and its good cash flows which allow for decent dividend yields.
Potential catalysts for the stock include (i) a turnaround of the HDD sector, and (ii) more meaningful contributions from Hitachi and Samsung. ' CIMB Research, Aug 17
This article appeared in The Edge Financial Daily, August 18, 2010.
Company Name: JCY INTERNATIONAL BERHAD
Research House: CIMB
JCY International Bhd
(Aug 17, RM1.18)
Maintain outperform at RM1.20 with target price RM2.28: We estimate that sales remained flat quarter-on-quarter (q-o-q) at RM552 million in 3QFY2010 though there is downside risk to our estimate given the q-o-q decline in volumes earlier reported by its two major HDD customers, Western Digital (-3%) and Seagate (-7%).
On a year-on-year basis, however, both drive makers still registered healthy double-digit growth of 24% and 15%, respectively. Other mitigating factors include maiden contributions from Seagate's top cover project and possible higher allocations from major customers.
We estimate that 3QFY2010 earnings before interest, tax, depreciation and amortisation (Ebitda) margin widened 20 basis points q-o-q to 17.4% on the back of better cost control. It had been hit by higher labour costs due to an increase in the number of contract workers in 2QFY2010.
However, the management has addressed this issue in May and this should have resulted in some improvement. But again, we see downside risk to our forecast due to slower sales and the negative impact of the weaker US dollar.
We expect JCY's guidance to be more muted this time in view of the uninspiring guidance from both WD and Seagate.
Its two HDD customers are projecting single-digit q-o-q volume growth in the coming quarter due to weakness in the European markets as well as higher inventory in the channel, which ended the June quarter at around five weeks against less than four weeks as at end-March. On a slightly positive note, JCY has started mass production of base plates for Hitachi and Samsung.
However, volume is unlikely to be significant this year. Also, we understand JCY is in active discussions with major customers for higher allocations to mitigate the current slower growth.
We leave our FY2010-12 profit forecasts unchanged ahead of the 3QFY2010 results and also retain our 'outperform' rating and target price of RM2.28. Our current target price of RM2.28 is based on 12 times CY2011 PER.
We believe the share price has already factored in the weak near-term outlook. JCY remains an 'outperform' as we believe it has the financial ability to weather the short-term weakness. We like its scale, which helps keep its returns consistently above industry and its good cash flows which allow for decent dividend yields.
Potential catalysts for the stock include (i) a turnaround of the HDD sector, and (ii) more meaningful contributions from Hitachi and Samsung. ' CIMB Research, Aug 17
This article appeared in The Edge Financial Daily, August 18, 2010.
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