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

Notion VTec Bhd
(Dec 16, RM1.62)
Maintain sell at RM1.65 with target price RM1.45: Notion has been served with a writ and statement of claim on behalf of three key personnel of Swiss Impressive Sdn Bhd for the alleged breach by Notion of a share sale agreement dated Dec 10, 2009.

The principal business of Swiss Impressive is in designing, tooling and manufacturing high precision appearance parts for digital cameras and other consumer electronic devices. Notion has 70% equity interest in this subsidiary, while two of the plaintiffs collectively own the remaining 30%. In FY10, Swiss Impressive recorded an unaudited revenue and loss after tax of RM3.5 million and RM300,000 respectively.

In 2009, Notion entered into a share sale agreement with the plaintiffs to dispose of its 70% equity interest in Swiss Impressive to the plaintiffs for RM400,000. Management was of the view the business of Swiss was no longer in line with Notion's present business strategy. The agreement lapsed prior to the completion and finalisation of an audit on Swiss. The suit came about due to the non-completion of the share sale agreement, which the plaintiffs alleged was due to a breach by Notion.

The plaintiffs are claiming RM4.5 million from Notion, but the company has instructed its solicitors to defend the action. This suit is unlikely to have a major impact on Notion. The financial contribution from Swiss to Notion was considered insignificant as Notion recorded RM226.8 million of revenue and RM37.4 million earnings in FY10. On the operations side, Notion had appointed new personnel to manage Swiss. Should Notion lose this case, it would have no problem absorbing the RM4.5 million claim considering that it has a cash hoard of RM36.9 million as at Sept 30.

Due to the poor outlook for the HDD business, possibly until 1Q11, and given the uncertainty over its 2.5' HDD business, we remain cautious and stick to our 'sell' call by pegging its target price at seven times FY11 price-earnings ratio. For FY11, the company will give more priority to the camera business to sustain its uninterrupted earnings growth streak since FY03. It plans to expand its plant in Thailand from 25,000 sq ft to 100,000 sq ft by May 2011, mainly to cater for Nikon and new camera customers. We think it is still too early to factor in any meaningful contribution from the Thai plant expansion. The Thailand plant only contributed revenue of about RM1.4 million for FY10. ' OSK Investment Research, Dec 16


This article appeared in The Edge Financial Daily, December 17, 2010.