Stock Name: NOTION
Company Name: NOTION VTEC BHD
Research House: MAYBANK

Notion Vtec Bhd
(Nov 24, RM1.64)
Upgrade to buy from sell at RM1.63 with target price of RM1.95: Results in 4Q were better than expected, with net profit rising 2.8-fold quarter-on-quarter (q-o-q) and earnings before interest, tax, depreciation and amortisation (Ebitda) margin expanding by 10.2 percentage points q-o-q. We upgrade Notion to a 'buy' (non-consensus) with an unchanged RM1.95 target price. On balance, we believe the negatives have been priced in after a 37% fall in share price following the disastrous 3Q results. Valuations are inexpensive, with a four to six times FY11/12 PER and improving business outlook.

4QFY10 net profit of RM8 million (+183% q-o-q; -37% y-o-y) took FY10 earnings to RM37 million (+4% y-o-y), ahead of our expectations but in line with consensus. This better performance was due to: (i) production turnaround (lower R&D costs, improved material yields, low incidence of rework and quality issue of its 2.5' base plate resolved); and (ii) improved product mix. The camera segment led sales in 4Q, followed by hard disk drive (HDD) and auto with a 48:35:17 mix (3Q: 38:46:16).

We are keeping our earnings unchanged, which implies a two-year net profit compounded average growth rate (CAGR) of 27%. We expect the camera segment to drive growth in FY11/12, fuelled by Nikon's increased orders. HDD will take a back seat. Capacity ramp-up will be moderate until issues pertaining to Samsung's 2.5' base plate production are fully resolved. With improving operations, it seems unlikely that Notion will drop the Samsung project now. Notion expects camera: HDD: auto segments to contribute a 54:32:14 sales mix in FY11.

Our RM1.95 target price is based on four times FY11 EV/Ebitda, which implies six times PER, reflecting regional (ex- Japan) HDD component makers valuations. Our upgraded 'buy' call is non-consensus ' we believe the management can sustain this turnaround, and demand for its products is at an early stage of business recovery. Notion declared an interim dividend per share of 4.5 sen in 4Q (-10% y-o-y; goes ex on Dec 29). ' Maybank IB Research, Nov 24


This article appeared in The Edge Financial Daily, November 25, 2010.