Friday, February 05, 2010

JCY, Subscribe Or Just Buy Notion Vtec?

The sole shareholder of JCY, Mr. Yong Yoon Kiong, is offering for sale 25.95% of his shareholdings in JCY, consists of 520m shares in an IPO to investors. Of the 520m shares on offer, 470m shares will be offered to institutional investors and 60m shares will be offered to employees and the Malaysian public. The indicative offer price at RM2.00 per share is approximately 20x FY09 P/E. The Retail Offering closes on Feb 8th while the Institutional Offering closes on Feb 10th. Listing for JCY will commence on Feb 25th.

Annie Liu (20090806-133831-01)

JCY International is one of the world’s largest global precision engineering manufacturers of HDD (hard disk drive) components. It supplies base plates, top covers, actuators, and antidiscs to Seagate and Western Digital, the two leading global HDD manufacturers (26.8% and 31.5% market share respectively). JCY competes on cost and economies of scale, and does this by placing their factories in strategic locations in Malaysia, Thailand and China to be close to their customers. By producing multiple components, JCY has been able to consistently achieve EBITDA margins of 15-16% and ROE levels of above 20%.

Interesting Points To Consider When Compared To Notion Vtec - I have chosen to compare with Notion Vtec because their product range and client base are quite similar, and both are well managed as they both put up the industry's highest ROE at 26% :

a) At RM2.00 JCY has a market cap of RM4.099bn while Notion's market cap is only RM460m. JCY is almost 10x bigger than Notion. The way I look at it, it is a lot easier for Notion to reach RM1bn in market cap than for JCY to reach RM6bn in market cap. If Notion reaches RM1bn, that is a 117% surge, while for JCY to reach RM6bn is only a 50% gain.

b) When you note that both parties have gung-ho clientele, it is hard not to see Notion catching up to JCY's size fast.

c) JCY's is coming in at a historical valuation of 19.8x PER while Notion is now valued at 11.7x current PER. The argument goes that JCY will see a significant 20%-30% jump in EPS in 2010. That is all very well and dandy to give that estimate - if that is really the case, why not list at the end of 2010 and show us the money, don't ask us to believe that there is money at the end of the rainbow.

d) One form of metrics comparison which makes JCY look OK is Price/Sales. JCY's figure is 2.3x while Notion's higher at 2.7x. But when you consider Price/Book Value, JCY looks out of whack again at 5.1x, because Notion's figure at just 2.6x.

Annie Liu (20090806-133836)

e) JCY is in a slightly net cash position of around 2.5 sen per share. Notion is in debt a bit but that's to be expected for a company trying to expand and grow its capacity. In fact, this is even more depressing for JCY as it shows that it has "little room for expansion".

My verdict: I would not be subscribing, I see it settling at RM1.80 following the listing. So difficult to see much upside, if there is any at all considering its RM2.00. If its not a growth stock, then it will be a dividend stock - that would be the support level. For 2009 and 2010(e), the company made RM202m and is slated to make RM207m respectively. That translates into an EPS 10 sen. I will be generous and ascribe profits to grow by 20% for year ending Sep 2010 = EPS 12 sen, and that they will pay 50% of profits as dividends = 6 sen. Assuming a dividend yield of 3.3% = RM1.80, the stock will find plenty of support at that level. I expect Notion to close the gap as more investors start focusing on the outlook and fundamentals of this industry.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

p/s photos: Annie Lau Sum Yau

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