Expecting declining sales and profitability. Amidst the rapid erosion in economic conditions, Miyoshi Precision Limited (MPL) updated that the group had seen the worst-ever quarter in 1Q09. Its major revenue generator, HDD segment, had suffered from faltering demand due to continued weakness in consumer spending. While MPL's sales has benefited from a strong USD, supported by relatively flat contribution from its consumer electronics (CE) segment, the group is expecting its 1HFY09 top line and bottom line to fall ~30% YoY.

2.5" HDD allocations from Fujitsu an uncertainty. Pertaining to the announcement by Toshiba to buy over Fujitsu's HDD business in mid-Feb 2009, MPL had also voiced concerns about its long-term business prospects. Despite having a strong 75% allocation of top covers for Fujitsu's 3.5" server Hard Disk Drives (HDDs), MPL may risk losing allocations for its 2.5" mobile HDDs; although Miyoshi has recently met up with Toshiba and Fujitsu and was told that there will not be any drastic changes in the coming year, there is a chance that Toshiba may eventually absorb the production in-house.

HP printer business in doubt too. In addition, we note that MPL's CE segment is likely to come under pressure with the anticipated change in Hewlett-Packard's (HP) printer supply chain. HP is said to have appointed three EMS/ODMs, namely Flextronics, Jabil and new incumbent Foxconn, for its printer segment. While MPL has historically been servicing Flextronics and Jabil, it may still lose business, as HP may allocate more to Foxconn which has ample capacity in-house. Out of 40% YTD contribution to revenue by the CE segment, we understand that ~30% is derived from HP printers.

Cutting costs to align with business slowdown. In face of the murky outlook and sharp slowdown, MPL has embarked on aggressive cost-cutting measures such as reducing its staff headcount by 20% and easing their salaries (including management) by 3-18% to trim its operating costs. In terms of capex, it is also limiting itself to S$2-4m for FY09 (S$2m in 1HFY09 mainly to revamp China plant). MPL says it sees a need to conserve cash, both for strategic opportunities and working capital, hence could not commit to a dividend payout.

Ceasing coverage. Notwithstanding the several prospective businesses sought by the group, we now see significant uncertainties in MPL's earnings following the expected changes in its major customers' arrangements. Together with the lack of regular daily trading liquidity in the stock and a reallocation of our coverage resources, we are CEASING COVERAGE on MPL.