Results

1HFY13 core net profit of RM3.6m came in below expectations, accounting for 39% and 12% of HLIB and consensus full-year forecast.

2QFY13: Revenue RM50.4m (-39.8% yoy, +3.5% qoq), EBITDA RM18.1m (-34.7% yoy, +14.1% qoq) and normalized PATAMI RM1.4m (-90.7% yoy, -37.2% qoq).

One-off items arising from the fire incident on New Year eve amounted to RM24.9m consisting of damage to machinery and equipment (RM12.7m), inventory (RM8.3m) and building and fixtures (RM3.9m).

Deviations

Disappointing sales for both HDD and camera segments.

Highlights

Revenue breakdown in 2QFY13 was HDD with RM19.9m, camera with RM20.7m and industrial / automotive with RM10.2m resulting in product mix ratio of HDD : camera : industrial / automotive equivalent of 39% : 41% : 20%.

The insurance compensation claim has not been recognized yet as the adjusters are still evaluating the claim although an interim claim of RM11.0m has been paid in April 2013. The fire claims is expected to be concluded before 3QFY13.

The minimum wage policy which came into effect on 1st Jan ate into margins as guided in the previous quarter with an estimation of RM500k for 2,500 workers. Mitigation plan to increase productivity, control of overtime and right size the work force did not materialize as machine capacity was largely idle / unfulfilled.

Judging from the performance in April, the company expects 2HFY13 sales to be about 30% - 40% higher than 1HFY13 which could translate into better margins and profitability.

The firm is optimistic that the group will recover despite the challenging season of economic slowdown and impact from the fire.

Risks

FOREX, raw material, labour costs and execution risks.

Forecasts

Unchanged pending more guidance from today’s analyst briefing.

Rating

Hold, TP: RM0.71

• Positives – Notion is in a better position compared to its peers as it has diversified away from HDDs. The company is well positioned to benefit from growth opportunities in the higher-margin camera segment.
• Negatives - Increasing raw material prices and MYR appreciation against USD. SSD as substitute.

Valuation

• Maintain our HOLD call on the equity with unaltered TP of RM0.71 based on DCF with WACC of 10.2% and TG of 0%.

Source: Hong Leong Investment Bank Research - 17 May 2013