Highlights

2QFY13 revenue of RM50.8m was generated on the back of overall average utilization rate of 50% - 60% yielding a bottom line of RM1.4m (after excluding noncore FOREX gain of RM1m), slightly above breakeven point.

However, the company guided that average utilization rate has been bumped up since April to 70% - 80% and is sustainable supported by 30% - 40% order increase in HDD and camera segments in April and May respectively. Order visibility is up to 3-6 months.

HDD: believes there is room for growth as digital data is expected to expand at CAGR of 40% per annum while focus has shifted from consumer PC to enterprise, data centres and cloud computing. Global HDD shipment is forecasted to grow at a healthy CAGR of 13.9% per annum reaching 700m units in 2013 (TrendFocus/IHS iSuppli). Consolidation amongst the HDD brand manufacturers (WD, Seagate and Toshiba) will stabilize pricing. The industry does not foresee a viable disruptive storage technology as complete substitute, not even SSD, but it will co-exist with HDD to cater for demand in ultrabook markets. It shared that currently, it is flooded with anti-disc orders due to its advancement in manufacturing over peers in terms of cost and speed.

Camera: CIPA’s 1Q13 shipment statistics for both SLR camera (2.6m units) and interchangeable lens (5.33m units) are not encouraging, implying a fall of 35.8% and 29.8% respectively, if annualized. Although the company remains optimistic of the market due to lifestyle digitalization, better affordability, simplicity and new model introduction, we think that smartphones/tablets are eroding SLR’s market share.

Using its technological prowess, Notion VTec is seeking out for niche opportunities in robotics, O&G, aerospace and consumer electronics market segments. The company has received orders for 40 sets of 6-axis robots which are priced between RM50k-60k each.

Notion VTec is also in the midst of negotiation to penetrate consumer electronics segment. If materialize, the contract would boost top line, potentially revisit the high of FY12 which was boosted by the Thai flood.

Risks

• FOREX, raw material, labour costs and execution risks.

Forecasts

Unchanged.

Rating

Hold TP: RM0.71

• Positives – Notion VTec 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, aerospace, O&G and robotics.
• 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 - 20 May 2013