JCY International Bhd
(IPO retail price of RM2 or 95% of institutional)
Not rated: JCY’s initial public offering (IPO) involves an offering of 530.2 million existing shares in total, comprising 470.3 million to institutions at a price to be determined via bookbuilding and 59.9 million shares to retail investors at RM2.

The final retail price will be the lower of RM2 or 95% of the institutional price. At the retail price of RM2, we believe JCY’s valuations are not compelling, suggesting limited upside.

At RM2 per share, JCY’s IPO valuation looks very expensive at a historical price earnings (PE) multiple of 19.7 times. In contrast, a smaller comparable peer, Notion VTec is trading at a historical PE multiple of only 11.8 times.

As no profit forecasts was provided in the prospectus, we have annualised FY10 figures to derive FY10 earnings per share (EPS) of 16.6 sen, but we urge caution as technology companies experience seasonally strong numbers in the Oct-Dec quarter. Hence, annualising 2MFY10 figures may not be reflective of JCY’s FY10 performance.

Despite the strong prospective FY10 EPS growth of 64% based on annualised figures, JCY’s valuation is still not very compelling at a relatively fair PE multiple of 12 times.

In contrast, assuming Notion achieves its profit guidance for FY10, we estimate Notion’s FY10 PE multiple will be 32% cheaper at only 8.2 times.

While JCY’s RM4.09 billion market capitalisation dwarfs that of Notion’s RM465 million, we think it is difficult to justify JCY’s premium valuations. Besides that, JCY’s FY10 PEG (price earnings-to-growth) is merely on par with Notion’s at 0.2 times.

JCY plans to adopt a progressive dividend policy of up to 50% of PAT (profit after tax). Based on annualised FY10 figures, dividend yields may go as high as 4.2% assuming the maximum 50% payout.

However, as JCY has highlighted it will adopt a progressive dividend policy, we conservatively assume that JCY may pay out 20% of its FY10 earnings as dividends, implying FY10 DPS (dividend per share) of 2.2 sen or dividend yields of 1.7%.

JCY is exposed to concentration risk as all of its revenue is directly or indirectly derived from Western Digital and Seagate. Consequently, JCY’s performance is highly dependent on the performance of its key customers.

We note, however, that JCY is currently in qualification with two new customers, Samsung and Hitachi which, when secured, will help diversify JCY’s future revenue. — ECM Libra Investment Research, Feb 8
This article appeared in The Edge Financial Daily, February 9, 2010.