Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Mon, 19 Aug 2019, 9:30 AM


Notion VTec - Still On the Mend

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Below expectations with FY18 CNL of RM39.3m, owing to higher-than-expected material costs alongside operational deleveraging. However, net DPS of 1.0 sen was a positive surprise. The group has provided for a write-off totalling c.RM75m, while claiming back RM159.5m as its material damage claim. Not Rated as we transfer the stock to our retail coverage. Previous recommendation was UP with TP of RM0.600.

Missed expectations. A wider-than-expected 4Q18 core net loss (NL) of RM17.2m (<-100% QoQ and <-100% YoY), brings FY18 core NL to RM39.3m vs. our FY18E CNL of RM32.9m; owing to a combination of higher-than-expected material costs alongside operational deleveraging. Note that the FY18 CNL has been adjusted for: (i) plant and equipment as well as inventories write-off amounting to RM75.4m as well as (ii) insurance total payments of RM159.4m. However, the single interim net dividend of 1.0 sen was a positive surprise.

YoY, FY18 revenue dropped 7% on lower sales orders following the fire incident on 20th October 2017 at its main Klang factory. Portfolio-wise, Camera products led the drop (-45%) followed by Automotive (- 110%) as these products were mainly manufactured in the affected Klang factory. As production capacity was down by >1/3 while the overhead cost cannot be charged out effectively, CNL of RM39.3m was recorded, all on top of the weaker USD/MYR as well as the higher aluminum prices during the period. QoQ, while revenue improved by 4% led by Engineered products (+28%, driven by Camera) followed by others (+21%), a much wider core NL of RM17.2m (vs. –RM0.5m in 3Q18) was recorded on higher costs of operations anchored by financing cost and amortization of newly acquired machines and other replacement expenses.

Still on the mend. For the post fire incidents update, the group has provided for a write-off totalling c.RM75m (an additional RM26m in the quarter) while putting forward an initial Business Interruption Loss claim (no amount mentioned). To date, NOTION has claimed back RM159.4m in total, with the latest sum being RM79m (5th tranche of RM35m on 16 th Oct 2018, final tranche of RM44.4m on 12th Nov 2018). Business-wise, the group had lost one account in the Camera business segment due to the fire incident with much reduced orders from Nikon as mentioned in 2Q18 results statement. Sales volume from this business is thus expected to be lower going forward. That said, demand for HDD spacer components from the enterprise bulk storage HDD as well as auto components from EV braking segment should partly offset the impact. Management’s current focus is on the completion of its main factory by end December 2018, with full restoration by 2Q19. This is in line with our base case assumption.

Not rated. Post model updates, our FY19E NP has been tweaked by 1% for house-keeping purposes. Valuation-wise, we are still using PBV methodology for now pending confirmation of full recovery closer to the date. We will switch the methodology back to PER to better reflect its earnings recovery once visibility returns. Coverage-wise, we transfer this stock from our core coverage to retail coverage under the On Our Radar series, given the lack of institutional interest in the stock. Hence, it is now a NOT RATED stock (from UNDERPERFORM previously). Previous TP was RM0.600 (based on 0.5x FY19E PBV, which also implies FY19E PER of 14.3x).

Source: Kenanga Research - 27 Nov 2018

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