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KUALA LUMPUR: Kenanga Investment Bank Research is expecting JCY International Bhd's valuation to double on massive earnings growth as it benefits from the upcycle in the HDD (hard disk drive) market.

The research house has a "trading buy" call on the stock with a fair value of RM1.35, which represents 100% upside to the last traded price of 67.5 sen on Tuesday.

According to Kenanga, JCY is well positioned in the HDD supply chain and is poised for a huge upcycle on rising demand in the sector.

"With the emphasis of social distancing still in place, the practice of home-based working is expected to continue for the foreseeable future.

"As such, web-based interactions (e.g. e-learning, video conferencing and remote access file sharing) have surged tremendously since the Covid-19 lockdown.

"Due to the sudden rise in traffic and bandwidth demand, cloud giants are experiencing a huge burst in data centre development," it said.

Kenanga is also expecting increases in HDD shipment volume after tracking JCY's two major customers, which contribute to more than 80% of group sales.

"We noticed that the volume of HDD shipment in the last six months (in terms of Exabyte) have jumped 47% YoY and 21% YoY, respectively.

"Both customers are guiding a strong ramp-up in 2H 2020 owing to robust demand for 14TB drives as well as the upcoming 16TB and 18TB drives," it said.

It added that JCY is realigning its production plant and bringing in new equipment to cater for the increase in components per drive, which rises in tandem with the growth in storage capacity.

Kenanga believes HDD will continue to dominate the data centre space over the next decade given its cost advantage over SSD (solid state drive), which costs nine to 10 times more for the same volume.

The research house added that the supply chain has consolidated since the 2011 Thailand flood, which has made JCY one of the few vendors left in the industry.

"As a result, key customers are loading more volume to the group, making JCY the main supplier for base plate, actuator and disc separation plates," it said.

Meanwhile, JCY is expanding into the automotive business, which could morph into a new earnings drive in two to three years, given the group's speciality in casting and fabrication.

Kenanga projects net profit in FY21 to grow three tims to RM150.8mil as the group takes on higher loading volume in 2H2020 and into 2021. It kept its "trading buy" call on the counter with fair value of RM1.35.


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