The strong demand uptick in 1QFY12 is not expected to continue. On top of that, the anticipated WD contract will be delayed indefinitely due to a key component shortage issue. If the strong sales and high volumes cannot be maintained, escalating costs would be a key threat. We revise our FY12 revenue and earnings forecasts downward by 7.5% and 37.3% respectively due to 1) overall slowdown in HDD orders, 2) possible omission of WD contribution and 3) unavoidable overhead costs. Downgrade to NEUTRAL as the company still holds strong fundamentals in the face of a negative outlook for its core HDD business. On the high side, we expect to see a positive surprise from its semiconductor business segment, which has traditionally underperformed. At a steep discount of 0.7x FY12 P/B, the downside is limited given its NTA of S$0.51/share is supported by CNC machines and properties. Our TP of S$0.35 is based on 8.7x (5-yr historical average) blended FY12/13 earnings.

WD dream delayed. Previous catalysts that were going to boost the HDD business for Broadway included a highly anticipated major WD contract. The actuator arm portion was originally scheduled to take place in 3Q 2012 followed by full assembly service in 2013. The contract could be delayed indefinitely until WD resolves its key component shortages issue.

Foray into oil & gas and aerospace industries. The group plans to acquire 70% stake of Millennium Arena for a total consideration of RM50.8m. We are positive on the move as it open up new opportunities in the aerospace and oil & gas space, leveraging on its existing precision component manufacturing capabilities. Furthermore, the group can take this opportunity to diversify away from its HDD business (representing 63.3% of its FY11 revenue) in view of the gloomy outlook.

Source: OSK