KUALA LUMPUR: Hard disk drive (HDD) component manufacturer JCY International Bhd’s profit guidance on Wednesday caused quite a stir in the market. For sceptics wondering if the earnings are sustainable, its management points to positive indicators on the horizon.
In a filing with Bursa Malaysia two days ago, JCY said it was expecting its earnings for the first quarter ended Dec 31 (1QFY12) to show a year-on-year leap of some 1,900%.
Analysts question whether JCY will be able to sustain this level of earnings in the coming months but JCY’s non-independent executive director James Wong said there are positive indicators on the horizon.
“We feel that the prices we are seeing will be maintained for quite a while,” Wong told The Edge Financial Daily.
JCY had in its announcement attributed the better profit performance to the increased average selling prices of components due to the October floods in Thailand, a more effective product mix, the appreciating US dollar versus the ringgit and cost management initiatives.
While the Thai floods during the last quarter of 2011 affected many IT-related companies, including major players Western Digital and Seagate, JCY’s facility there was spared. As such, many analysts had expected the company to show improved results.
According to Wong, the average selling prices for components rose by between 10% and 30% following the floods.
“The floods in Thailand changed the whole industry. They not only pushed up the average selling price, but also made the players more aware about the security of supply,” he said.
Although the water levels have subsided, many companies are now dealing with the fallout, which would entail writing off not just inventories but also machines.
Analysts believe the shortages will continue in the first half of 2012. This is in line with a report by technology research firm Gartner, which said the floods would cut the supply of HDD by 25% or more over the next six to nine months.
JCY’s 1QFY12 results are due to be announced in February. According to Wong, JCY made the profit guidance — which may be considered rare in corporate Malaysia — to be fair to public minority shareholders.
The Thai floods aside, Wong said the prospects for the HDD industry are already looking up.
“Based on a HDD industry consultant’s report, the global market demand for storage was about 330 terabytes for 2010. Now the demand for storage is higher than ever with the advent of digitalisation. Also, with the rise of cloud computing, the need for storage will rise further,” he said.
That’s why JCY has earmarked RM300 million for capital expenditure over the next 24 months, with the bulk going towards buying new machines for its factories in China, Malaysia and Thailand.
“We have already built the buildings and infrastructure, it is now a matter of getting the machines in. In China particularly, we have over 380,000 sq ft of new production floor space available for our immediate expansion,” said Wong.
JCY also had seen improvements from varying its product mix to four components, which gave the company more flexibility; and implementing various cost management initiatives that saw better allocation of resources.
OSK Research and CIMB Research both have a “trading buy” on JCY, while Hong Leong Investment Bank Research has a “hold”. While OSK upgraded its fair value on JCY to RM1.48 from RM1.30, the research house said it expects earnings to normalise in tandem with the restoration work in flood-hit areas.
“We reiterate our view that the Thai floods could represent short-term pain but long-term gain for the industry as a whole as we believe that major HDD customers Western Digital and Seagate would take the opportunity to push for better pricing,” said OSK.
CIMB also upgraded its fair value on JCY to RM1.54 from RM1.14, stating: “We project JCY to turn net cash and offer an attractive dividend yield of 9% by FY13.”
Hong Leong was more cautious on the development in the event that customers turn back to their original vendors once operations are fully restored.
JCY closed at a 17-month high of RM1.26 yesterday. The counter had already been on an upward trend over the past few weeks following reports that it would benefit from the Thai floods. Over the past 12 months, the stock had been trading at an average of 63.8 sen.
In a filing with Bursa Malaysia two days ago, JCY said it was expecting its earnings for the first quarter ended Dec 31 (1QFY12) to show a year-on-year leap of some 1,900%.
Analysts question whether JCY will be able to sustain this level of earnings in the coming months but JCY’s non-independent executive director James Wong said there are positive indicators on the horizon.
“We feel that the prices we are seeing will be maintained for quite a while,” Wong told The Edge Financial Daily.
JCY had in its announcement attributed the better profit performance to the increased average selling prices of components due to the October floods in Thailand, a more effective product mix, the appreciating US dollar versus the ringgit and cost management initiatives.
While the Thai floods during the last quarter of 2011 affected many IT-related companies, including major players Western Digital and Seagate, JCY’s facility there was spared. As such, many analysts had expected the company to show improved results.
According to Wong, the average selling prices for components rose by between 10% and 30% following the floods.
“The floods in Thailand changed the whole industry. They not only pushed up the average selling price, but also made the players more aware about the security of supply,” he said.
Although the water levels have subsided, many companies are now dealing with the fallout, which would entail writing off not just inventories but also machines.
Analysts believe the shortages will continue in the first half of 2012. This is in line with a report by technology research firm Gartner, which said the floods would cut the supply of HDD by 25% or more over the next six to nine months.
JCY’s 1QFY12 results are due to be announced in February. According to Wong, JCY made the profit guidance — which may be considered rare in corporate Malaysia — to be fair to public minority shareholders.
The Thai floods aside, Wong said the prospects for the HDD industry are already looking up.
“Based on a HDD industry consultant’s report, the global market demand for storage was about 330 terabytes for 2010. Now the demand for storage is higher than ever with the advent of digitalisation. Also, with the rise of cloud computing, the need for storage will rise further,” he said.
That’s why JCY has earmarked RM300 million for capital expenditure over the next 24 months, with the bulk going towards buying new machines for its factories in China, Malaysia and Thailand.
“We have already built the buildings and infrastructure, it is now a matter of getting the machines in. In China particularly, we have over 380,000 sq ft of new production floor space available for our immediate expansion,” said Wong.
JCY also had seen improvements from varying its product mix to four components, which gave the company more flexibility; and implementing various cost management initiatives that saw better allocation of resources.
OSK Research and CIMB Research both have a “trading buy” on JCY, while Hong Leong Investment Bank Research has a “hold”. While OSK upgraded its fair value on JCY to RM1.48 from RM1.30, the research house said it expects earnings to normalise in tandem with the restoration work in flood-hit areas.
“We reiterate our view that the Thai floods could represent short-term pain but long-term gain for the industry as a whole as we believe that major HDD customers Western Digital and Seagate would take the opportunity to push for better pricing,” said OSK.
CIMB also upgraded its fair value on JCY to RM1.54 from RM1.14, stating: “We project JCY to turn net cash and offer an attractive dividend yield of 9% by FY13.”
Hong Leong was more cautious on the development in the event that customers turn back to their original vendors once operations are fully restored.
JCY closed at a 17-month high of RM1.26 yesterday. The counter had already been on an upward trend over the past few weeks following reports that it would benefit from the Thai floods. Over the past 12 months, the stock had been trading at an average of 63.8 sen.
