This article first appeared in The Edge Financial Daily, on November 25, 2015.

KUALA LUMPUR: Integrated hard disk drive (HDD) component maker JCY International Bhd, whose net profit nearly doubled in its latest financial year ended Sept 30, (FY15), is looking for mergers and acquisitions (M&A) opportunities overseas to expand its market share and customer base.

JCY finance director Datuk James Wong said the group is looking at foreign companies that are fairly priced and can complement its current core business, to benefit from economies of scale.

“The ones we are talking to are overseas companies. The company has to be reasonably sizeable,” he told reporters and analysts at a briefing yesterday, but declined to disclose more.

He said the acquisition can be funded internally, via bank borrowings or the issuance of new shares. 

Wong said the company’s net cash amount would end up at about RM200 million, after accounting for its latest dividend payment of three sen per share, and its oustanding debts.

In a note on the same day, UOB Kay Hian, which described JCY as “cash-rich,” said the latter is exploring the viability of an M&A with a peer — many of whom are “looking to dispose of their businesses due to financial or operational difficulties” — but noted that negotiations are still at a preliminary stage.

It also noted that while overall storage demand is expected to be soft in the coming quarter, “JCY is shielded by a favourable exchange rate as well as a potential value-accretive M&A that would allow it to gain market share”. As such, it has maintained its ‘buy’ call on the stock, with a target price (TP) of RM1.10.

Wong, meanwhile, is “cautiously optimistic” on the outlook of the company moving forward.

“Total addressable market (TAM) is unlikely to increase a lot. Due to industry consolidation, more likely in the next 12 months, we probably can take over some of our competitors’ volume,” he said.

He explained that the growth of JCY’s volume is very much tracking along TAM numbers. TAM is a term typically used to refer to the revenue opportunity available for a product.

Estimates for TAM for HDD is expected to remain largely flat for the next few quarters, according to JCY.

JCY’s net profit for FY15 came in at RM209.5 million, up 90.7% from RM109.89 million in FY14, mainly boosted by forex gain; revenue, however, improved only by 4% to RM1.94 billion compared with RM1.87 billion a year ago.

Wong said the management will closely monitor and manage the exchange rate as well as commodity prices.

“We are not depending on the foreign exchange (forex). We will continue to improve cost efficiency by reducing our number of workers [via automation],” he said. JCY’s worker numbers have decreased to 16,000 compared to 20,000 a year ago.

Wong further noted that JCY’s capital expenditure is about RM50 million per year, mostly for the upgrading of machineries to improve product quality and efficiency.

Meanwhile, JCY is seeking approval from the Malaysia Investment Development Authority (Mida) to extend its tax-exempt status for another 10 years, which Wong said the group is confident of obtaining. The tax-free status will be expiring in April next year.

Wong said tax savings from 2002 to 2012 amounted to RM600 million. In FY15, the tax savings came up to RM50 million. 

UOB Kay Hian noted that should JCY fail to extend the extension and be required to pay the standard corporate tax rate of 24%, this would lead to a 15% downside to its net profit forecasts (FY16: RM218 million; FY17: RM244 million; FY18: RM249 million) and lower its TP to RM0.93.

JCY shares closed 2.27% lower at 86 sen, with 31.63 million shares done, for a market capitalisation of RM1.78 billion. Year to date, its share price has risen more than 67%.