RHB Now Downgrades JCY Again - Fair Value 46 sen

Err.. previously on Bursa stock market.

On 1 March 2011, RHB downgraded JCY Fair Value to just 22 sen only.

This was the snapshot of their report then.


On 31 March, RHB had upgraded JCY to a market perform! No, they did not upgrade JCY in a report on JCY but instead it upgraded JCY on a market outlook report. On 31 March report, titled 'Market Outlook & Strategy 2Q2011 : Climbing The Wall Of Worries'.

Page 55 of the report:

• We believe JCY could benefi t from the industry consolidation as this could reduce pricing pressures. In addition, JCY could potentially secure higher volume loading for new HDD components from the enlarged WD. Therefore, we are raising our FY11-13 net profi t forecast by 241.5%, 224.5% and 167.8% respectively to reflect: 1) higher margin assumptions as we believe the average selling price would remain stable; and 2) higher revenue assumptions on the back of improving corporate and consumer spending. Furthermore, we have rolled forward our valuation base year to CY11 (from FY11). Correspondingly, we have raised our fair value to RM0.81/ share based on 10x CY11 EPS and we, therefore, upgrade our call on the stock to Market Perform.
  

So what do we have?

On 1 March 2011, JCY was at 66 sen. It was downgraded to a mere 22 sen.

On 31st March 2011, JCY was upgraded from 22 sen to a 81 sen!

It's now 19 May 2011. as posted yesterday, JCY earnings was way below estimates! and today, RHB have this to say on JCY.



Fair value is now 46 sen!!!!

LOL!

I am in a daze. :P

How?

Perhaps they shouldn't make that 81 sen upgrade call on 31 March 2011. Because at this moment of time, per JCY's current earnings, RHB's initial estimates would had been spot on!!!

Anyway, do note that RHB earnings estimate for JCY is 86.2 million (eps of 4 sen). In their initial downgrade of JCY to 22 sen report, RHB earnings estimate was 44.9 million. (eps of 2.2 sen)

And how is JCY doing? Well JCY said it made a net profit of 12.458 million for its 2nd quarter, which means that current first half earnings from JCY is only a 'paltry' 19.970 million (eps of 0.98 sen only!!)

How?

46 sen?

Do you think that even at 46 sen, it's too optmistic?

Read more...

A Quick Look at JCY's Latest Earnings

Posted 1 March 2011: Is RHB's Downgrade Of JCY And Fair Value Call Of Only 22 sen Too Harsh?

Ok I know that Yes, RHB DID Change Its Fair Value On JCY! and incredibly RHB on 3 May 2011 wrote:

• Downgrade to Underperform. Correspondingly, our fair value is lowered to RM0.74/share based on 10x CY11 EPS. While we believe JCY stands to benefit from the consolidation within the industry which could result in less ASP pressures in addition to mitigating oversupply, we are cautious on JCY’s earnings visibility as it resolves its operational issues. Therefore, due to the limited upside to the share price, we downgrade our call to Underperform (from market perform).

Anyway, I will repaste the following section the 1 March 2011 posting:

Compare the recent earnings of JCY and then compare it with RHB's estimates.

Let's see.....

End Nov 2010, JCY reported a net loss of 22 million for its fy 2004 Q4 earnings.

On Friday, JCY said it made a net profit of 7.512 million for its fy 2011 Q1. Yes, a net profit of only 7.512 million.

And assuming ( I know.. I will make an ass of u and me! :P ) an annualised earnings estimate, at best we can assume that JCY will make 7.5 x 4, which works to a mere 30 million.

Now RHB's estimate earnings is 44 million. Which is much better than using an annualised estimate.

So is RHB's estimate a bit harsh?

Yes? Or maybe fair?

If it's fair... then based on a 10x earnings multiple, 22 sen is not too harsh is it?

And compare the issues JCY is having as per RHB's report:

1. lower revenue (-16.9% yoy);


2. higher cost of sales due to rising raw material prices (+12% pts yoy); and


3. stronger RM vs. US$.

And RHB's outlook for the HDD sector.

• we believe the outlook for the industry is waning as there could still be excess HDD inventory due to the persistent weaker-than-expected demand for desktop PCs and netbooks compounded by the rising demand for alternative storage (i.e. solid state drives (SSD).

Weaker demand for desktop? Is that true? How many are buying a desktop nowadays? And what about laptops too? Are the price of the new laptops getting cheaper?

Or how about the external HDD market? The prices are falling like crazy yes? And if the prices are getting cheaper, how much can these HDD makers make?

And the USD vs RM issue.

Does the USD look like getting some strength against the RM anytime soon?

And then you have raising raw material cost.

How are all these reasonings given by RHB Research? Are they too conservative?

And if the answer is no... what if RHB's projection is true?

And let's stretch it a bit more.... say RHB estimate is off. Let's say it's off by 100 percent! :)

Which means, let's assume JCY makes 88 million instead of 44 million. Now JCY has 2044 million shares. Based on earnings of 88 million, this would equate to an eps of around 4 sen only. An eps of 4 sen. How much do you think it's fair value?

That's the key question, how much do you think it's fair value?

Today JCY reported its quarterly earnings. Yes, on a q-q basis, quarterly earnings showed tremendous improvement. Remember that JCY said it made a net profit of 7.512 million for its fy 2011 Q1. Today JCY said it made a net profit of 12.458 million ( this is a quick look and I did not look into any details), which is a great improvement.

But.... 12.458 million... just isn't enough.

This meant that current first half earnings from JCY is only a 'paltry' 19.970 million and with a share base of 2044 million shares, it equates to an eps of only 0.98 sen only!!!

Well it looks like RHB's initial earnings estimate of 44 million for JCY is pretty spot on for now!

Read more...

Yes, RHB DID Change Its Fair Value On JCY!

From the posting: QC And The Research Reports

• limko said...
  It is not an isolated case in OSK's report on Axiata or MMC, it is the same with RHB's report on JCY which came down from around 1.8 to 0.8 and then 0.22 back to 0.8 recently, all in matter of months if not weeks.

It was a very interesting comment because I was not aware that RHB had made such a drastic adjustment in its fair value call for JCY.

Why?

Because there wasn't a new report released on JCY! Not that I was aware of.

As far as I was aware of, RHB's downgrade of JCY to 22 sen was under the report "JCY International Berhad : Back To Black, But Disappointing Again". It was published on 28 Feb 2011. This was highlighted in the posting http://everything27.blogspot.com/2011/03/is-rhbs-downgrade-of-jcy-and-fair-value.html

Now get this.

Thanks to limko, I now realised that RHB changed its views on JCY.

And no, they did not make a new report.

Now thanks to limko, I was told to look for 5th April 2011. Yes, on 5th April, just 5 weeks after downgrading JCY to 28 sen, RHB revised its call on JCY under the report "Semiconductor: Slight Drop MoM In Feb, But Stronger YoY Growth'.

I kid you not!

Yes, surely RHB could have made a whole new report on JCY itself, right? It's a massive upgrade, yes? Why mention it in a semiconductor sector report? Is JCY even a semicond stock?

Glee!

This is seriously not right!

Here's the screen shot.

And their reasoning?

• .... JCY: Beneficiary of the industry’s consolidation. We believe JCY could benefit from the industry consolidation as this could reduce pricing pressures. In addition, JCY could potentially secure higher volume loading for new HDD components from the enlarged WD. Therefore, we have raised our FY11-13 net profit forecast by 241.5%, 224.5% and 167.8% respectively to reflect: 1) higher margin assumptions as we believe the average selling price would remain stable; and 2) higher revenue assumptions on the back of improving corporate and consumer spending. Furthermore, we have rolled forward our valuation to base year to CY11 (from FY11). Correspondingly, we have raised our fair value to RM0.81/share based on 10x CY11 EPS. We upgraded JCY to Market Perform in our strategy report dated 31 March (from underperform previously).

huh? They raised their net proft forecast for JCY by 241.5%, 224.5% and 167.8%????

WOW!

And on 31 March, RHB had upgraded JCY to a market perform????

I then had to dig up that 31 March report, titled 'Market Outlook & Strategy 2Q2011 : Climbing The Wall Of Worries'.

Page 55 of the report:

• We believe JCY could benefi t from the industry consolidation as this could reduce pricing pressures. In addition, JCY could potentially secure higher volume loading for new HDD components from the enlarged WD. Therefore, we are raising our FY11-13 net profi t forecast by 241.5%, 224.5% and 167.8% respectively to reflect: 1) higher margin assumptions as we believe the average selling price would remain stable; and 2) higher revenue assumptions on the back of improving corporate and consumer spending. Furthermore, we have rolled forward our valuation base year to CY11 (from FY11). Correspondingly, we have raised our fair value to RM0.81/ share based on 10x CY11 EPS and we, therefore, upgrade our call on the stock to Market Perform.

Seriously?

With such a massive earnings forecast upgrade, shouldn't RHB released an individual report on JCY?

I might be wrong but by mentioning JCY and revising the forecasts in other reports, it's rather snakey! Yes, it feels snakey too me! (Hey that's my flawed opinion! )

Just incredible!

***** I have to add this: I do not know and I do not care how JCY the stock will trade. I am just utterly flabbergasted on how RHB could make such a drastic change in opinion on JCY fair value.

Read more...

What Do You Look For In A Research Report? Part II

Price targets. Again for most market punters, price target is everything. Absolutely.

Eat porridge or eat rice also depends on how juicy the price target is.

All we can hear is '... but XYZ (brokerage house) said price target was 5.00 leh... so buy, buy, buyyyyyyy!' ( or is it bye, bye, bye? :P )

An infamous old story retold. It was 11 March 2004. The stock last traded 4.16. The stock had already gone up a lot. Seriously a lot. ( Exactly a year ago, before the stock was trading at 4.16, it was trading less than 90 sen! )

That was a massive movement, yes?

And the stock? Seriously? Its fundamental was shocking. :P

March 2003: Quarterly rpt on consolidated results for the financial period ended 31/12/2002. It reported yearly loss of 6.6 million. The previous year it lost 7.4 million.

But yet... somehow.. miraculously... its shares were in demand. Yes, somehow, someone in Aug 2003, had the hindsight to buy a 10% stake in this loss making company.

Private Placement of 4,725,000 new ordinary shares of RM1.00 each ("Private Placement")

And somehow... in yet another miracle of miracle... the stock soared and soared... it flew up, up and away to the orbit. By 11 March 2004, it hit 4.16.

Now that 10% private placement investors must be much better than Warren Buffett! Bought 10% in Aug 2003 at 1.00. Comes March 2004, the shares were worth 4.16.

No need to even talk about the stocks fundamentals. Who needs fundamentals? Who cares if the company is losing money? Who really cares?

Do you care? Why you want to make so much noise? You no make money in it? Don't be a sore loser! Stop your moaning!

Even Bursa smacked the stock with the UMA or UNUSUAL MARKET ACTION .

And so there we were.

On 11 March 2004, the stock closed the previous trading day at 4.16 and in came OSK with an truly amazing, out of the world BUY recommendation on the stock, giving the stock a target price of 5.00!

Yo dudes! Yo dudettes!

This is the stock yo! It's worth 5 bucks a pop! And it's only trading at 4.16.

You want or not?

I was amazed. Seriously, that so-called analyst must be extremely skillful. No joke. It's not easy at all. The stock had ZERO earnings. Losing money. And the stock had almost gained 5 folds since a year ago. Yet, this analyst could come up with a BUY recommendation with a 20% call!

Now that's skills!

Eat your heart out Goldie!

Here's a screen shot.

As can be seen, at 4.16, the stock had a market cap of around 226.3 million!

This was the stock's most recent quarterly earnings before March 2004. (LOL! Now that's 10 years ago, babe! :P)

Quarterly rpt on consolidated results for the financial period ended 31/12/2003

Look at the revenue? 34 million only. Yeah revenue only. And yet the market is valuing the stock at 226.3 million already. ( ho ho ho .. life is good! (how many times must I tell you this?) )

And somehow, OSK young analyst then, could came up with a report, suggesting that this company is worth....... another 20% more! Gee another 20%? That means the stock's market cap is suggesting the company is worth 271 million!

It doesn't matter the stock lost money the last 3 years, it doesn't matter the sales turnover is only a mere 34 million! And it certainly matters not the poor balance sheet it has! It doesn't matter that it had net debts of over 50 million! And it seriously doesn't matter that the company had some 273 thousand ( that's not a typo! So stop starring at me! LOL! :P ) only in its piggy bank!

Good is good eh?

And incredibly, the analyst DID acknowledge the concerns of the stock's track record!

In an effort to learn more, let me reproduce by pasting the exact words:

Concerns on Track Record

Productivity after the lull

We note that Timberwell has not conducted large scale timber extraction for the past 3years and that its mills have run on low capacity since 2002. As such, there is concern that its productivity and EBITDA margins may be lower than that of its peers.

Net debt of RM54.8m

Timberwell may focus on clearing its debt before it pays out any dividend as its current interest expenses have averaged RM4m over the past 4 years. Nonetheless, with the increased optimism in the timber sector, Timberwell may be able to restructure or refinance its debts over a longer period.

Valuation

Fair value at RM5.00

We have estimated an average price of USD320 per cu m for Timberwell¡¦s plywood prices and USD360 per cu m for its sawn timber given the recent run up of prices. We have also forecasted a CAGR of 2.6% for plywood and sawn timber prices. Based on these estimates, our EPS forecast of 26.3 sen for FY04 means Timberwell is trading at 15.8x projected PER. This is a 16% discount to the timber sector PER of 18.8x as of 10th March. With the revaluation of FMU3 which will be submitted for approval this quarter, Timberwell is also trading at 0.9x of its book value.

Timberwell has outperformed the KLCI by over 200% since December 2003. This may reflect the growing realisation that its sustainable forest concession gives it a big advantage as long as the company is able to extract what has already been allocated to it. Based on our Discounted Cash Flow model, we value Timberwell at RM5.00 given its potential for long term stable earnings. The value is price sensitive, with a 1% increase in the CAGR of log, plywood and sawn timber prices resulting in a fair value of RM5.81 while a 1% reduction in the prices CAGR gives a fair value of RM3.95. The stock is currently trading with a potential upside of 20.2% based on assumed prices for log, plywood and sawn timber.

There you go.

Do you like the way the analyst had reasoned the stock should be worth that much?

First, "An independent valuation of FMU3 has priced it at RM220m. This translates into a huge jump for Timberwell's assets and a corresponding 4.12x increase in its NTA/share from RM1.21 to RM4.99" A re-evaluation of asset.

It then brushes aside the net debt issue. ( I wonder if the analyst saw the company had only 273 thousand left in its piggy bank!)

Then it gave an EPS forecast of 26.3 sen!

Fantastic! From losing money the last three years, Timberwell earnings is supposed to drop from the heavenly skies. The stock earnings for fy 2004, despite all the recent year losses, is projected to be 14.3 million or an earnings per share of 26.3 sen. Yes babe!

From zero EPS to a 26.3 sen EPS! WOW! Well done!

And then... of course... to spice it up... a DISCOUNTING CASH FLOW model is created for Timberwell.

All the right ingredients eh?

So here comes the trick question.

Is the TARGET PRICE important or what is more important is the reasoning why the stock deserves such TARGET PRICE?

Think about it... :P

On 11 March 2004, the stock opened at 4.16. Had a high of 4.18 and a low of 4.02. It closed at 4.06.

Ok... stop laughing.

Please.

The very next day.... err.... the stock.... PLUNGED!!!!!!!!!!!!!

No joke!

TWO TRADING DAYS later, the stock closed at 2.74!

From 4.16 to 2.74!

Holy moo moo cow!

Take a look!

And get this.

A year later, Feb 2005, if one takes a look at Timwell's quarterly earnings, Quarterly rpt on consolidated results for the financial period ended 31/12/2004, one would have realised that the FY 2003 final audited losses were adjusted to 5.95 million! And yeah, Timwell had losses for FY 2004 too! And it had losses for FY 2005 too!

Of course OSK has its Disclaimers nicely inserted back then!

• The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein.

Remember that.

Remember they accept no liability for any direct or indirect losses!

Of course they have since changed the wordings slightly.

• All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest and/or underwriting commitments in the securities mentioned.

So how?

Is the TARGET PRICE important or what is more important is the reasoning why the stock deserves such TARGET PRICE?

Of course, hackers would scream out loud!

Hindsight is simply story telling!

Here are some of the more recent ones.

Remember the JCY story? (Oops that passed a long time already yes?) 27th Aug 2010: Regarding JCY International

• JCY earned some 207 million for its fy 2009. CIMB says times are good in 2010, so JCY should earn some 359 million! And 2011, JCY earnings will be even more super. JCY should earn some 441 million by then!

And JCY's Target Price of 2.68 was based on this projection. A projection that JCY should earn 441 million.

And the reality?

• .... JCY's total 3 quarters so far is only 198.944 million. And to make matters worse, the earnings are declining each quarter. Would JCY even post a net earnings of 250 million for its fy 2010? I dunno. And what's CIMB's estimates again? 359 million for 2010 and 441 million for 2011!

Clearly, back in Aug 2010, one could clearly see that CIMB numbers were way too optimistic.

And sadly, JCY started missing... and the downgrade of earnings had to be made.... and with it ... the downgrade of Target Prices.

Do remember JCY has 2044 million shares!

Simple exercise for fun. Do you think JCY should trade at around 1.00?

Let's back track. For JCY to trade at 1.00 and at a PER of 12x (why 12x? Well that's what folks like CIMB had been using for JCY) JCY eps should be around 8.3 sen. And based on 2044 million shares, this would translate to an earnings of 169.652 million. Ok so far?

Is an earnings of 169.652 million possible for JCY?

JCY Q1 earnings is only 7.5 million only!!!! Can JCY's remaining 3 quarters earn some 162 million? Or an average of 54 million per quarter? From 7.5 million per quarter to 54 million per quarter?

Ok. How about a more recent example?

Take Perisai. Have you not heard people suggesting out loud that Perisai target price is 1.43?

Yes?

Did you hear that?

Why 1.43?

Cos the anaylsts said so!

:P

Seriously. Is the target price all that matters?

Or should one take the time and read how the anaylsts are reasoning why the stock is worth so much?

From this month's posting: Why Perisai Is Rated So High By The Local Analysts?

Let me paste what's written here again:

My comments: Again as stated before the potential is a mere USD25 per annum revenue. (revenue and not profit). I am also curious the statement 'NOT the same asset'. Look that asset is going to be 'refurbished' (Yes, going to be refurbished. The rig is not even fully converted yet! and yes, Perisai is buying a refurbished unit. A reconditioned unit.). So doesn't the 'refurbished' unit comes from the very same asset???

♦ Potential for upside. Our back-of-the-envelope calculation suggests net profit contribution from the charter to be around RM40-50m, vs. the FY10 reported net profit of RM10.3m and FY11 consensus net profit of RM30m (which excludes the Intan acquisition as well as this proposal). As this proposal is only expected to be completed in the 4Q11, the full-year impact would be in FY12, lifting the current consensus FY12 net profit estimate to around RM70-80m. Assuming 846m enlarged share capital, this suggests an FY12 EPS of 8.3-9.5 sen or a PER of 10.6x. Tentatively assuming a target PER of 15x, i.e. in line with our target for the market, this implies a fair value estimate of RM1.25-1.43/share.

My comments: RHB is now declaring that the NET PROFIT contribution from the charter works out to be RM 40-50 million and the very basis of their reasoning that Perisai should be worth around RM 1.25 to 1.43 per share.

Now that's their reasoning and based on their estimated earnings they reckon Perisai should be worth that high.

Simple question to ask is what if their estimate is way too optimistic?

Ah... why such a question?

Reasoning is simple also.

The higher the estimate the higher the assumed fair value is.

Yes?

From my flawed mindset, I would ask the following questions...

The obvious glaring thing for me is that Perisai's own comments is that Garuda is only giving them a USD 25 million revenue per annum. To be exact, let me paste again.

• 9) The expected revenue of USD25 million is based on the bareboat charter to be entered between the Target Company and GEM.

Using a slightly higher USD exchange rate conversion of 3.1 to the Ringgit, this would be about rm 77.5 million expected revenue per annum.

And is 'expected' revenue only. Sometimes the figure can be lower.

Now what's RHB estimated PROFIT? Let me quote them again:

• Our back-of-the-envelope calculation suggests net profit contribution from the charter to be around RM40-50m,

rm 40-50 million per annum??

Take the lower number, 40 million.

So RHB is saying from a revenue of 77.5 million, the net profit contribution should be at least 40 million????

WOW!

Isn't that an extremely profitable business?

But is the charter of a MOPU such a profitable business???

Is that possible?

Now the following document is posted by Perisai: PERISAI-announcement(290311).doc

• The bareboat charter of MOPU business is a competitive industry, with other players operating in the Malaysian market. Competitive factors include price and quality of services as well as the quality and availability of MOPUs.

Those were Perisai's own words.

The bareboat charter of MOPU is a competitive industry!

If that's the case... how did RHB analyst come out with an estimate net profit contribution of at least rm 40 million??

Hey in terms of net profit margins, RHB is saying a net profit margin of 40/77.5 = 52%!!!!

A 52% net profit margin estimation when Perisai declared that "The bareboat charter of MOPU is a competitive industry"!

WOW! WOW! and WOW!

Think about that.

And the other silly question I would ask is if Garuda's earnings potential is good, ie 40-50 million per annum, why is Nagendram selling Garuda to Perisai for only 210 million????

How?

Think about it. Is RHB estimate way too optimistic?

What if.... Perisai's earnings from this charter business is only worth say 10 million per annum. Adding in Intan Offshore possible earnings contributions and Perisai's own business, perhaps a 40 million net earnings is pssible.

Now the problem with a 40 million estimate, based on an extremely enlarged new share base of 845.791 million shares, this would work out to an eps of only 5 sen per share!

And get this... if I use a 15x multiple on Perisai, this would equate to rough estimate of only 75 sen!

Ok. Of course that's a flawed simple thinking.

However, you can play around the numbers yourself. Yes, PLEASE DON'T USE MY FLAWED ESTIMATE OF 40 MILLION! :=)

You could use a net profit estimate of 50 million. This would equate to an eps of only 6 sen!

What about CIMB Research? Here's a snap shot.

• Perisai is paying US$70m (RM210m) in cash and shares for Garuda Energy (L) Ltd, owner of a jack-up rig that is being converted into a MOPU, which will be supplied to an oil major. We estimate that Garuda will contribute RM40m p.a. to Perisai’s bottomline effective 4Q11. In view of this, we raise our EPS forecasts by 25.0% for FY11, 76.8% for FY12 and 67.6% for FY13.

Same.

CIMB also is using the estimate value of Rm 40 million!

How?

Ah.. perhaps their (RHB and CIMB) estimates are all spot on... and my posting is simply flawed!

Yes, that is is very much possible but whatever it is, best you think about it.

So how?

Is the TARGET PRICE important or what is more important is the reasoning why the stock deserves such TARGET PRICE?

Read more...

Good news for JCY?

San Jose-based Hitachi Global sold for $4.3 billion to Western Digital
By Brandon Bailey
Posted: 03/08/2011 03:55:40 AM PST
Updated: 03/08/2011 03:58:57 AM PST

In the biggest tech deal of the year so far, San Jose-based Hitachi Global Storage Technologies, a Japanese-owned company with deep roots in Silicon Valley, said Monday that it will be acquired by disk-drive giant Western Digital for $4.3 billion in cash and stock.

The deal will give Irvine-based Western Digital control over nearly 50 percent of the market for hard-disk drives, which are facing weaker demand as computer makers turn to greater use of so-called "flash", or solid-state, memory instead.

Some analysts, however, said the consolidation could benefit both Western Digital and its leading competitor, Seagate Technology, which operates out of Scotts Valley. News of the deal sent Western Digital's stock up 15.6 percent to close Monday at $34.68, while Seagate shares rose 9 percent to close at $13.56.

Hitachi Global Storage is a wholly owned subsidiary of Hitachi, the Japanese conglomerate that makes a wide range of industrial, commercial and consumer products. But the Silicon Valley operation has a history dating to the 1950s, when IBM engineers in San Jose developed the first hard-disk drive for commercial use.

For many years, IBM made disk drives and other products at its manufacturing complex on Cottle Road in South San Jose, until the company sold the operation to Hitachi for roughly $2 billion in 2003, which led to the creation of Hitachi Global Storage Technology.

The Hitachi subsidiary currently does much of its manufacturing in Asia, but it has about 2,000 employees at two sites in San Jose, where it maintains its corporate headquarters as well as a research and development operation and some manufacturing.

Hitachi also has pursued plans to convert some of the old IBM property into a mixed residential and retail development; one piece has already become the site of a new Lowe's home improvement store. Hitachi Global Storage spokesman Jim Pascoe said the sale to Western Digital won't affect those plans because Hitachi is retaining the site.

Western Digital is paying $3.5 billion in cash and roughly $750 million in stock to acquire Hitachi Global. Hitachi will have a 10 percent stake in the combined companies and two seats on Western's board. Hitachi Global Storage CEO Steve Milligan will become president under longtime Western CEO John Coyne.

The deal, subject to regulatory approval, will increase Western Digital's share of the disk-drive market from 31 percent to about 49 percent, according to Aaron Rakers, an analyst at the Stifel Nicolaus investment firm. Seagate has about 29 percent of the market.

Although the disk drive business has not been highly profitable for Hitachi, analysts said Hitachi's products should boost Western's standing in the higher-margin business of selling drives for commercial computer systems, where Seagate has been dominant. Western has been stronger in the consumer market.

Overall demand for hard-disk drives has been in decline recently: While the rotating disks are still widely used in PCs and commercial computer systems, manufacturers are making greater use of solid-state "flash" memory in everything from tablets and smartphones to laptops and even some commercial systems. Flash memory is generally faster and lighter-weight, and its historically higher prices are coming down.

The growing popularity of tablet computers is expected to help lower demand for disk drives by 4 percent in the first quarter of this year, according to a report last week from the research firm IHS iSuppli.

While the Hitachi sale could raise concerns about Western's sizable market share, some analysts said the industry consolidation could benefit both Western and Seagate by helping to keep prices more stable and encouraging computer makers to buy from both companies, so as not to become dependent on either one


http://www.mercurynews.com/business-headlines/ci_17558200?nclick_check=1

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So JCY's main customer, Western Digital got bigger market share of the hard disk market, which should be better for JCY, right?

But.... what about the economics of the hard disk market itself?

Is it getting any better?

Or should one note the fact that overall demand for hard disk is on the decline?

Read more...

Is RHB's Downgrade Of JCY And Fair Value Call Of Only 22 sen Too Harsh?

Posted this afternoon: How Was JCY's Earnings?

In that posting, I highlighted a snapshot of RHB's report on JCY's earning review. The recommendation and target price was a shocker for many.

Yes, as you can see RHB downgraded JCY to an underperform and gave JCY a target price of a mere 22 sen.

Why so low?

Is RHB over reacting?

Now if it was me.. here's what I will do.

Compare the recent earnings of JCY and then compare it with RHB's estimates.

Let's see.....

End Nov 2010, JCY reported a net loss of 22 million for its fy 2004 Q4 earnings.

On Friday, JCY said it made a net profit of 7.512 million for its fy 2011 Q1. Yes, a net profit of only 7.512 million.

And assuming ( I know.. I will make an ass of u and me! :P ) an annualised earnings estimate, at best we can assume that JCY will make 7.5 x 4, which works to a mere 30 million.

Now RHB's estimate earnings is 44 million. Which is much better than using an annualised estimate.

So is RHB's estimate a bit harsh?

Yes? Or maybe fair?

If it's fair... then based on a 10x earnings multiple, 22 sen is not too harsh is it?

And compare the issues JCY is having as per RHB's report:

1. lower revenue (-16.9% yoy);
2. higher cost of sales due to rising raw material prices (+12% pts yoy); and
3. stronger RM vs. US$.

And RHB's outlook for the HDD sector.

• we believe the outlook for the industry is waning as there could still be excess HDD inventory due to the persistent weaker-than-expected demand for desktop PCs and netbooks compounded by the rising demand for alternative storage (i.e. solid state drives (SSD).

Weaker demand for desktop? Is that true? How many are buying a desktop nowadays? And what about laptops too? Are the price of the new laptops getting cheaper?

Or how about the external HDD market? The prices are falling like crazy yes? And if the prices are getting cheaper, how much can these HDD makers make?

And the USD vs RM issue.

Does the USD look like getting some strength against the RM anytime soon?

And then you have raising raw material cost.

How are all these reasonings given by RHB Research? Are they too conservative?

And if the answer is no... what if RHB's projection is true?

And let's stretch it a bit more.... say RHB estimate is off. Let's say it's off by 100 percent! :)

Which means, let's assume JCY makes 88 million instead of 44 million. Now JCY has 2044 million shares. Based on earnings of 88 million, this would equate to an eps of around 4 sen only. An eps of 4 sen. How much do you think it's fair value?

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How Was JCY's Earnings?

I had posted on JCY a couple of times before.

On Aug 2010, I posted: Regarding JCY International ( recommended reading. :) )

** made the following remark then: =>

And on this Monday, 23 Aug 2010, CIMB writes again on JCY.
JCY has fallen to just 1.17. (Will it be a penny stock soon? :P )

JCY is now trading below 0.65

On Dec 2010, I made the following update. Quick Update on JCY's Earnings

I was amused by CIMB's numbers. These numbers, the earnings forecasts does play an important part. On one hand, some might argue that earnings forecasts is an impossible task but then if that's the case, why is the stock valued based on earnings forecasts which are super over optimistic?

1. During IPO or April 2010: JCY earned some 207 million for its fy 2009. CIMB says times are good in 2010, so JCY should earn some 359 million. And 2011, JCY earnings will be even more super. JCY should earn some 441 million by then!
2. 21 May 2010 - Target price lowered! fy 2010 earnings is now lowered to 297.3 million and fy 2011 earnings is now lowered to 370.8 million
3. Monday, 23 Aug 2010 - CIMB to earn some 263 million for its fy 2010. And ....... for fy 2011, JCY is now projected to earn only 304.7 million

They marketed the stock based on an earnings estimate of 441 million. Yes, that's the IPO fair value projection. During IPO, April 2010, CIMB valued JCY target price of 2.68 based on 2011 earnings estimate of 441 million.

It's now only Dec 2010. CIMB has slashed JCY target price to just 0.92 based on 2011 earnings of just 168.8 million.

Now JCY announced its earnings last Friday.

Here's the very brief earnings numbers.

A first quarter earnings of only 7.512 million????

Ouch!

(Based on the above numbers and assuming that you did not know it was JCY, how would rate such a company?)

And what did CIMB project for JCY on Dec 2010? CIMB Research thought JCY could be earning some 168.8 million (despite 10 Q4 loss of 22.5 million) for fy 2011.

And this way below estimates.

This is what CIMB said in its report today..

• Below; maintain NEUTRAL. JCY’s core net profit for 1QFY9/11, which excludes
  RM2.3m forex loss, tumbled 88% yoy to RM9.9m or just 4% of our full-year forecast
  and 6% of consensus estimates. It was 64% below our expectations, with the key
  variance being the slower-than-expected recovery of sales and margin. Although
  our estimates are already the lowest in the market, we are scaling back our FY11-13 forecasts by 22-34% as its performance suggests a slower recovery in sales and margins. Still applying 8x CY12 P/E, which we think is a fair P/E for HDD component suppliers, we cut our target price from RM0.92 to RM0.72. The stock remains a NEUTRAL until we see evidence of a gradual recovery in earnings.

An neutral call?

If you refer to Dec posting. Quick Update on JCY's Earnings

• Yesterday, 1 Dec 2010, CIMB gave it a huge downgrade!
  JCY's target price which was 1.88 on 25 Nov 2010 was lowered to just 0.92!!!!!!!!!

JCY today is a neutral at 0.66 sen???

And for the info.. CIMB adjusted its fy 2011 earnings for JCY to just 112 million.

Incredible!

Remember during its IPO, CIMB boldly projected JCY's earnings for fy 2011 to be 441 million. That was just in April 2010.

oO

And it was funny how CIMB said its estimates are already the lowest in the market!

Are CIMB Research serious? Are they reviewing the company or are they trying desperately to sell themselves?

And then I saw RHB's report (LOL! I knew right there and then, I need to make this posting).

*the couple of arrows drawn onto the report says it all*

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Quick Update on JCY's Earnings

Update to the posting Regarding JCY International

On 25th Nov 2010, CIMB 'warned' the potential glitch in earnings...

JCY reported its earnings on 30th Nov 2010.

It wasn't just weak it was horrific!

Yesterday, 1 Dec 2010, CIMB gave it a huge downgrade!

JCY's target price which was 1.88 on 25 Nov 2010 was lowered to just 0.92!!!!!!!!!

Holy cow!

Err.... well on one hand it's certainly GREAT to see CIMB Research realising the potential humongous shortfall in earnings from JCY and forewarned its readers on the 25th but....... the size of the downgrade is certainly difficult to swallow!!!

CIMB yesterday lowered its forecast for JCY's 2011 earnings to just 168.8 million

Lets compare and refer to the posting Regarding JCY International

1. During IPO or April 2010: JCY earned some 207 million for its fy 2009. CIMB says times are good in 2010, so JCY should earn some 359 million! And 2011, JCY earnings will be even more super. JCY should earn some 441 million by then!
2. 21 May 2010 - Target price lowered! fy 2010 earnings is now lowered to 297.3 million and fy 2011 earnings is now lowered to 370.8 million
3. Monday, 23 Aug 2010 - CIMB to earn some 263 million for its fy 2010. And ....... for fy 2011, JCY is now projected to earn only 304.7 million

How?

Incredible isn't it?

During IPO, April 2010, CIMB valued JCY target price of 2.68 based on 2011 earnings estimate of 441 million.

It's now only Dec 2010. CIMB has slashed JCY target price to just 0.92 based on 2011 earnings of just 168.8 million.

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Regarding JCY International

JCY was listed on 25 Feb 2010. It's performance since listing (ipo price was 1.60) have been rather dire.

Now UBS AG and CIMB were the joint managing underwriters and bookrunners for the IPO.

And since this is a very 'new' stock, I would refer to CIMB Research IPO notes on JCY.

But there wasn't an IPO research notes on JCY from CIMB Research!

They only began coverage on the stock on 19th April 2010. JCY then was 1.74 and CIMB gave it a very optimistic target price of 2.68.

And mind you... the report.... was 52 pages long!

LOL!

Page 26 of the report..


Hmm.. some might not like that arrowed statement.

• JCY generated RM19m of negative free cash flow in 1QFY10 due largely to the repayment of RM80m owed to its shareholder.

Yes, JCY is in net debt and the very cynical would be fast hand, fast leg and point out that one of the very first thing JCY did as a listed entity was to pay off the debts owed to one of the shareholder. Yo.. it's 80 million bucks hor!

CIMB's valuation of JCY... and the key is 12x fy11 PE.

12x CY11 PE

To give a simple illustration on how to play the funky music.

Say a company's current eps is indicating an annual eps of 13 sen.

Ok, the cynics would say, to make the stock sexy and seductive, the eps is projected to GROW to 22.3 sen by a whopping 71.5%! ( LOL! say only lah... assume. :P )

1. Using 12x PE on 13 sen, the stock would be valued at 12x0.13 = 1.56.
2. Using 12x PE on 22.3 sen, the stock would value at 12x0.223 = 2.68.

See how the stock is all dressed to look super seductive?

Come on honey... you want me or not?

:P

Yes, I do not doubt future earnings is very important because a company is only worth what it could earn in the future but sometimes they are those insinuating reports that really suggest that a cow could be orbited to the moon so that it could do its nightly moon walking! ( LOL! A moon walker cow! :P ).

Seriously, there are many a times when one is bewildered by the earnings estimates made on a company.

So where is CIMB's key financial tables for JCY?

I found my answer at Page 47.

Ahem...

Here's my flawed interpretations.

JCY earned some 207 million for its fy 2009. CIMB says times are good in 2010, so JCY should earn some 359 million! And 2011, JCY earnings will be even more super. JCY should earn some 441 million by then!

How? Am I reading it wrongly?

So the whole key to CIMB's valuation of JCY is based on an optimistic earnings of 441 million or an eps of around 22.3 sen.

So how has JCY fared so far?

Ok.. I am aware that there are only 3 quarters of earnings posted by JCY and it's seriously too few to pass judgement but for the sake of comparing what JCY earned versus CIMB's estimates...

Ahm... total 3 quarters so far is only 198.944 million.

And to make matters worse, the earnings are declining each quarter.

Would JCY even post a net earnings of 250 million for its fy 2010? I dunno.

And what's CIMB's estimates again? 359 million for 2010 and 441 million for 2011!

oO

Ah... but I have to give CIMB a little credit. :P

Why? Because they have continuously re-adjusted their estimates. ( Cynics would say ... what for? Damages already done!)

7 May 2010.

21 May 2010 - Target price lowered!

CIMB research said:

• ... we cut our FY10-12 EPS by 13-17% for lower sales and margins after factoring in our new forex forecast of RM3.15:US$1 for FY11 vs. RM3.40 previously.

( Ah... strong RM ( or issit lembik USD) hurting JCY. )

fy 2010 earnings is now lowered to 297.3 million and fy 2011 earnings is now lowered to 370.8 million.

17 Aug 2010 - CIMB acknowledges the possible weakness but it refrains from jumping the gun and held onto their earning estimates and since JCY has fallen to 1.20, CIMB used the classical 'it had already priced in the possible weakness' as their reasoning.

And on this Monday, 23 Aug 2010, CIMB writes again on JCY.

JCY has fallen to just 1.17. (Will it be a penny stock soon? :P )

Earnings estimates are cut once more and the target price is lowered!

But the valuation method remains the same - it's based on 12x CY11 P/E.

• Accordingly, our target price, which is based on 12x CY11 P/E, falls from RM2.28 to RM1.88.

The financial table on JCY from CIMB

JCY is now projected by CIMB to earn some 263 million for its fy 2010.

And ....... for fy 2011, JCY is now projected to earn only 304.7 million or an eps of 14.9 sen.

Hmm... 12x CY11 PE... my calculator for 12 x 0.149 = 1.788.... I wonder how CIMB got 1.88. :P

And there you go.... the story of how JCY's earnings projection went from 441 million to just 304.7 million.

(ps: some are fussy and they would demand that I be more precise. :P

Ok.. the 441 million was projected on 19th April 2010. On 23 August 2010, that projection has been revised down to just 304.7 million. Precise enough? :P )

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