Wednesday, November 30, 2011

CIMB Research upgrades JCY to trading buy from trading sell

KUALA LUMPUR (Nov 30): CIMB Equities Research has upgraded hard-disk drive manufacturer JCY International from a trading sell to a trading buy.

It said on Wednesday its latest channel checks confirmed that Western Digital (WD) had booked JCY's capacity even though WD's volume will be down significantly.

'In view of this and higher average selling prices (ASP), we now expect a significant jump in earnings in the coming quarters,' it said.

CIMB Research said that the FY9/11 results were better than consensus and its loss forecast of RM7.8m, triggering FY12-13 EPS upgrades.

'This raises our target price from 58 sen to RM1.14 even though we now value it at 6.0 times CY13 P/E (previously 8.0 times CY12), closer to comparables. Upgrade from Trading Sell to Trading Buy,' it said.

It said JCY's sales were fairly in line with its estimate. The main positive surprise was the strength of the recovery of gross margin on the back of better operating efficiency and good cost control.

This, together with RM5.4 million forex gains, enabled JCY to turn from losses in 3QFY11 to a net profit of RM26.4 million in 4Q. It generated positive free cash flow during the quarter, helped by lower capex. As expected, no final dividend was declared.

'Our previous downgrade of JCY to Trading Sell was premised on the anticipated plunge in volume from WD which had signalled a 50%+ on-quarter drop in shipments in 4Q11,' it said.

CIMB Research said however, its industry contacts indicate that WD has diverted most of its orders to JCY. JCY is also getting more enquiries from Seagate.

"We hear from other suppliers that ASPs have gone up by more than 10%. In view of these factors and JCY's better operating efficiency, we expect a significant jump in JCY's earnings in the quarters ahead,' it said.


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