You are on page 1of 5

PP 7767/09/2010(025354

)

20 May 2010

Malaysia

Corporate Highlights
V is it Note

RHB Research Institute Sdn Bhd A member of the RHB Banking Group
Company No: 233327 -M

MARKET DATELINE

20 May 2010 Share Price Fair Value Recom : : : RM2.73 RM4.68 Outperform (Maintained)
Bloomberg: NVB MK

Notion Vtec
Set To Deliver

Table 1 : Investment Statistics (NOTION; Code: 0083)

Net
FYE Sep 2009 2010f 2011f

EPS EPS (sen)
25.6 34.7 46.8

Net PER (x)
10.7 7.9 5.8

Revenue (RMm)
172.7 236.9 340.7

Profit (RMm)
36.0 53.6 72.4

Growth (%)
6.7 35.3 35.1

C.EPS* (sen)
36.0 42.0

P/NTA (x)
2.4 2.1 1.6 1.2

P/CF (x)
7.2 6.0 4.3

ROE (%)
24.0 28.9 30.4

Gearing (x)
0.2 0.1 0.1

GDY (%)
1.8 2.3 2.3

2012f 482.3 98.9 64.0 4.3 55.0 36.6 Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC

3.2 31.5 Cash 2.3 * Consensus Based On IBES Estimates Issued Capital (m shares) Market Cap (RMm) Daily Trading Vol (m shs) 52wk Price Range (RM) Major Shareholders: Choo Wing Hong Choo Wing Onn Nikon FYE Sep EPS chg (%) Var to Cons (%) PE Band Chart FY10 -4.3 -3.6 FY11 +0.8 154.6 421.9 299.5 3.52-0.80 (%) 14.2 9.5 9.0 FY12 +0.8

On track to deliver 2.5’’ baseplate target. According to management, construction work on its new 150k sq ft plant is near completion. The new plant which is expected to house most of the base plate production capacity is set to commence production by Sep-10. Note that management expects capex of around RM80m to ramp up the base plate capacity to 1m/month, 5m/month, and 7m/month by FY10-12 respectively from 350-400k/month (currently) vs. 100k/month in Jan-10, pending the arrival of additional equipment and machinery i.e. die casting and computer numerical control (CNC) machines. Additionally, management is planning to increase the total workforce to 3,000 by 2011 (vs. 1,900 currently). Riding on volume loading for Western Digital (WD). The company expects stronger volume loading in 2H2010 from WD on the back of strong demand for HDD components i.e. antidisks, disc clamps, and spacers as well as WD’s market share gain. Recall that WD overtook Seagate as the number one HDD vendor in 1Q10. WD now expects to increase its total HDD shipments by more than 20%. While Notion’s current capacity for these components is 800-900k/month, management is expecting to increase capacity to 1.5-2.0m/month by end-2010. Risks to our view. 1) Rise in prices of raw materials; and 2) Fluctuations in the exchange rate. Forecasts. Given the volume loading of the HDD segment, as well as the anticipation of a robust demand for data storage, we have re-adjusted our forecast assumptions. We have forecast the HDD segment to be the key driver for FY10-12 revenue (vs. camera segment previously). Given the anticipation of higher costs this year stemming from higher start-up costs and product testing, we have trimmed our FY10 net profit forecast by 4.3% to RM53.6m. However, given stronger volume loading as well as tight cost control and higher utilisation rate, we have tweaked upwards our FY11-12 net profit by 0.8% p.a. respectively. Longer term, we believe there is potential upside to our FY11-12 forecasts arising from: 1) Stronger-than-expected sales of spindle motor hubs and 2.5’’ base plates from Alphana; 2) Stronger contribution from its Thailand operations; and 3) Higher contribution from the auto segment. Investment case. After the revision in earnings, our indicative fair value has been raised to RM4.68 from RM4.64 based on 10x target FY09/11 PER. We are maintaining our Outperform call on the stock.

+11.5 +16.3

PER = 11x PER = 8x PER = 5x

♦ ♦

Relative Performance To FBM KLCI

Notion Vtec

FBM KLCI

Wong Chin Wai (603) 92802158 wong.chin.wai@rhb.com.my Yap Huey Chiang (603) 92802166 yap.huey.chiang@rhb.com.my

Please read important disclosures at the end of this report.

Page 1 of 5

A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com

20 May 2010
Key Takeaways

On track to deliver 2.5’’ baseplate target. According to management, construction work on its new 150k sq ft plant is near completion. The new plant, which is expected to house most of the base plate production capacity, is set to commence production by Sep-10. Note that management expects capex of around RM80m to ramp up the base plate capacity to 1m/month, 5m/month, and 7m/month by FY10-12 respectively from 350-400k/month (currently) vs. 100k/month in Jan-10, pending the arrival of additional equipment and machinery i.e. die casting and computer numerical control (CNC) machines. Additionally, management is planning to increase the total workforce to 3,000 by 2011 (vs. 1,900 currently). Riding on volume loading for Western Digital (WD). The company expects stronger volume loading in 2H2010 from WD on the back of strong demand for HDD components i.e. antidisks, disc clamps, and spacers as well as WD’s market share gain. Recall that WD overtook Seagate as the number one HDD vendor in 1Q10. WD now expects to increase its total HDD shipments by more than 20%. While Notion’s current capacity for these components is 800-900k/month, management is expecting to increase capacity to 1.5-2.0m/month by end-2010. New customer: Alphana Tech? We understand Notion is undergoing a qualification stage for the 2.5’’ base plates and spindle motor hubs for Alphana Tech (Alphana). Alphana is a major player for HDD components. While management is tight-lipped on these developments, we believe the company is more than capable of qualifying given its proven track record. Assuming Alphana’s volume loading of 700k/month for both the 2.5’’ base plate and spindle motor hubs in FY11-12, our sensitivity analysis shows that FY11-12 revenue forecast would increase by 12.8% and 9.1% respectively. Note that we have not factored in sales contribution from Alphana. Updates on Thailand. Management expects contribution from Thailand to pick up momentum in FY11-12 driven mainly by the capacity expansion with the delivery of 50-60 CNC machines and 100 CNC machines by end-11 (vs. 30 CNC machines currently). Although the capacity ramp-up has been aggressive for the HDD segment, management has stated that it will not fall back in its plans to expand the plant’s floor space to 225k sq ft (vs. 25k sq ft currently). Furthermore, we understand that the plant is currently bidding for new contracts from Continental and TRW. Note that Thailand plant is currently enjoying an eight-year tax incentive. Expecting higher costs. Management had stated the possibility of incurring higher costs due to the high startup costs as well as product testing costs that may affect FY10 earnings. We were informed the product testing is necessary to ensure the components meet the quality and specifications from the customers. However, management expects any increase in cost overruns would be partly mitigated given its stringent cost-saving measures and efficient in-house tooling equipment. One of the measures highlighted is shifting the machining processes which are currently done in Klang to Thailand to leverage on the lower labour costs. Forex risk. We note that 70-75% of revenue is hedged at a forward RM/USD rate. We highlight that these policies would help mitigate the risk of exchange rate volatility. Note that 10sen rise of the RM against the USD would reduce FY11 earnings by 3-4%p.a.. Risks and mitigating factors. We believe Notion’s risks include: 1) Rise in prices of raw materials i.e. aluminium alloys account for 27% of total costs; and 2) Fluctuations in the exchange rate (90% of revenue is derived in USD). In mitigation, we note that the company is focused on: 1) cost-cutting initiatives including inhouse tooling capabilities; and 2) putting into place hedging policies to alleviate the exchange rate volatility.

♦ ♦

Forecasts and Recommendation

Forecasts. Given the volume loading of the HDD segment, as well as the anticipation of robust demand for data storage, we have re-adjusted our forecasts assumptions. We have forecast the HDD segment to be the key driver for FY10-12 revenue (vs. camera segment previously). Given the anticipation of higher costs this year stemming from higher start-up costs and product testing, we have trimmed our FY10 net profit forecast by 4.3% to RM53.6m. However, given stronger volume loading as well as lower cost stemming from tight cost control and higher utilisation rate, we have tweaked upwards our FY11-12 net profit by 0.8% p.a. respectively. Longer term, we believe there is potential upside to our FY11-12 forecasts arising from: 1) Stronger-than-expected sales of spindle motor hubs and 2.5’’ base plates from Alphana; 2) Stronger contribution from its Thailand operations; and 3) Higher contribution from the auto segment.

Page 2 of 5
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com

20 May 2010

Proposal 10% of private placement and an issue of free warrants. Notion previously proposed a private placement of 10% of its issued share capital, and an issue of free warrants on the basis of 1 for every 5 shares. With our revised net profit, the private placement alone will dilute Notion’s FY09/11 EPS by 6.62%. Together with the potential dilution from the free warrants (assuming an exercise price of RM2.73 per warrant), we estimate FY09/11 fully-diluted EPS of 38.5 sen or a dilution of 17.7% (see Table 2), while our fair value would fall to RM3.85. Nevertheless, this would still imply 41% upside. Investment case. After the revision in earnings, we have raised our indicative fair value from RM4.64 to RM4.68 based on 10x target FY09/11 PER. We are maintaining our Outperform call on the stock.
Table 2: EPS Dilution From Private Placement and Warrants Issue Private Placement Private Placement + Warrants Issue 72.4 6.1 78.5 204.0 38.5 -17.7

FY09/11 (RMm) Net Profit Interest savings Adjusted Net Profit Share Capital^ (m shares) FD EPS (sen) Chg % Key Assumptions: Exercise price for free warrants of RM2.73, interest cost of 6% And tax rate of 25%.

72.4 1.9 74.3 170.1 43.7 -6.6

Table 3. Earnings Forecasts FYE Sep (RMm) HDD Camera Auto/industrial Turnover EBITDA EBITDA margin (%) FY09 69.1 74.3 29.4 172.7 63.9 37.0 FY10F 114.0 90.6 32.3 236.9 85.0 35.9 FY11F 193.8 111.4 35.5 340.7 120.3 35.3 FY12F 300.3 139.3 42.6 482.3 160.8 33.4

Table 4. Forecast Assumptions FYE Sep Revenue growth (%) HDD Camera Auto Total Shipments units (m) HDD Camera FY10F 35.3 65.0 22.0 10.0 FY10 48.8 8.8 2.1 FY11F 41.2 70.0 23.0 10.0 FY11 68.0 10.6 2.3 FY12F 38.9 55.0 25.0 20.0 FY12 103.4 12.8 2.9

Depreciation EBIT EBIT margin (%) Interest expense Associates Pretax profit Taxation Minority interest Net profit

(18.2) 45.7 26.5 (3.7) 1.0 43.0 (7.0) 0.1 36.0

(19.6) 65.4 27.6 (4.1) 1.0 62.4 (10.0) 0.2 53.6

(29.2) 91.1 26.7 (4.9) 0.0 86.2 (13.8) 0.0 72.4

(37.7) 123.1 25.5 (5.4) 0.0 117.7 (18.8) 0.0 98.9

Auto

Source: Company data, RHBRI estimates

Source: Company data, RHBRI estimates

Page 3 of 5
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com

20 May 2010

Chart 1: Notion Technical View Point

♦ ♦

Notion began its uptrend since Apr 2009 and the stock has been trending along the UTL after that. When its upward momentum intensified in Jan 2010, it launched an attempt to remove the tough hurdle at RM3.50, but it immediately triggered a powerful profit-taking dip back to the UTL, before recovering slowly in the next few months. In late Mar 2010, after failing another attempt at RM3.50, it kicked off another round of downswing. This time, it fell off the supportive UTL and triggered a medium-term bearish signal, when the 10-day SMA cut below then 40-day SMA near RM3.30. Since then, the stock traded under strong selling pressure and the share price plunged further to RM2.73 yesterday, below an important support at RM2.75. Given the bearish technical momentum readings, the stock may see further selling pressure in the near term, if it fails to recapture the RM2.75 level today. Next key support is at RM2.30.

♦ ♦

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction. “Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports. This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel. The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues. The recommendation framework for stocks and sectors are as follows : Stock Ratings Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months. Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks. Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months. Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months. Industry/Sector Ratings

Page 4 of 5
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com

20 May 2010
Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months. Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months. Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months. RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. securities, subject to the duties of confidentiality, will be made available upon request. Additional information on recommended

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the actions of third parties in this respect. This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the actions of third parties in this respect.

Page 5 of 5
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com