Background

Notion VTec Berhad ('Notion') is involved in the manufacture & sales of precision components and tools. Notion's main business segments are Hard Disk Drive (HDD), Camera & Automotive components.

Recent Corporate move

Nikon Corp Ltd has emerged as a substantial shareholder in Notion after taking up 10% or 13.84 million shares in a private placement exercise. The shares were placed out for a total of RM33.78 million or RM2.44 a share, the price set on Jan 6, 2010, at a 10% discount to the weighted average market price of RM2.7066 for the five preceding market days. For more, go here.

The market is generally very positive on Notion for having secured Nikon as a strategic investor. While it's certainly a big achievement for Notion, I couldn't help feeling the loss of some independence on the part of Notion in its dealing with camera makers from hereon. Would this sacrifice be well compensated by increased orders from Nikon? Only time will tell...

Recent Financial Results

Notion has just announced its results for QE31/12/2009, where its net profit increased by 8.9% q-o-q or 95.8% y-o-y to RM14.2 million while turnover increased by 3.7% q-o-q or 24.4% y-o-y to RM56.3 million. The improved performance was attributed to revenue growth & better margin in the Camera segment and greater economies of scale.


Table 1: Notion's 8 quarterly results

The growth in Notion's top-line has been very impressive. Its bottom-line surged strongly in the past 3 quarters, which indicates clearly that the increased sale was not achieved by sacrificing its margin.


Chart 1: Notion's 13 quarterly results

Valuation

Notion (closed at RM2.79 yesterday) is now trading at a PER of 8.6 times (based on last 4 quarters' EPS of 32.4 sen). With increased capacity coming on (especially from its Thailand plant), we can expect Notion's earning to increase further and its PER to drop. However, I feel that Notion's business is a cyclical business where we cannot expect a PER of 10 times. As such, I believe Notion's fair value would be capped at RM3.20-30 for the next 6 months.

Technical Outlook

Notion has risen by more than 330% in the past 10 months, from a low of RM0.80 in April last year to a recent high of RM3.50 in January. After a slow uptrend (SS), the share rallied aggressively in an accelerated uptrend S1-S1). In the recent market selldown, Notion corrected back to the uptrend line (S1-S1) support at RM2.80. It had broken below that uptrend line marginally for two days & today it has recovered above it. A break below uptrend line (S1-S1) could see Notion go lower to seek out the support from the slower uptrend line (SS) at RM2.20-25.


Chart 2: Notion's daily chart as at Feb 10, 2010 (Source: Tradesignum)

From Chart 3 below, we can see that Notion's recent rally has been very steep & as such it may enter into a short consolidation, if the overall market were to turn cautious or bearish.


Chart 3: Notion's weekly chart as at Feb 10, 2010 (Source: Tradesignum)

Conclusion

I believe we need to rein in our excitement regarding Notion since the stock has gained more than 300% over a period of 10 months. I expect the immediate uptrend line support at RM2.80 to be tested again if overall market sentiment remained cautious or turned bearish. If this support can hold, then it may be a good entry level to this stock. Failing which, you should wait for the support given by the slower uptrend line at RM2.20-25.