Results

Although FY14 top line came within expectations, core net profit of RM21.1m came in above expectations, accounting for 131% and 115% of HLIB and consensus full year estimates respectively.

One-off items:

1. 4QFY13: inventory impairment of ~RM2.0m and unrealized FOREX loss of RM7.5m.

2. 3QFY13: Fire insurance claim resulted in cumulative exceptional gain of RM8.2m (net of tax of RM2.8m).

Deviations

Better-than-expected cost efficiency which may attribute to lower material costs.

Dividend

Declared and approved interim tax-exempt dividend of 1.0 sen per share (4QFY12: 2.0 sen) with ex-date on 23rd Dec. YTD dividend is 1.0 sen (excluding distribution of share dividend) vs. 3.0 sen in FY12.

Highlights

Revenue breakdown in 4QFY13 was HDD with RM21.2m, camera with RM29.2m and industrial / automotive with RM11.6m resulting in product mix ratio of HDD : camera : industrial / automotive equivalent to 34% : 47% : 19%.

4QFY13 utilization rate breakdown: HDD ~70%, camera 50% - 60% and automotive ~80%.

Customers painted a bleak outlook for camera with possible 30% - 40% order reductions blaming on the anemic economy conditions in China and Europe. However, this may be partly cushioned by growth in automotive segment which is expected to increase top line contribution from 19% to 25% thanks to new carburetor casting project.

Downsizing workforce from 2.2k to 1.8k with no additional cost or provisions.

Expect Alcyone to turnaround to its named plated capacity of 1.2m oz per annum. It is expected to be producing 100k oz of silver per month in early 2014 and become profitable once it reaches its designed capacity.

Guidance: revenue to grow by ~7% to ~RM240m with lower PAT margin in the range of 10% to 15% while trying to maintain EBITDA margin of ~30%.

Risks

FOREX, raw material, labor costs and execution risks.

Forecasts

Tweaked model according to deviations above coupled with latest guidance. In turn, this has resulted in FY14-15 EPS downward revision by 6.2% and 38.0% respectively.

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. Appreciation of USD against MYR.

Negatives - Rise raw material prices and SSD as substitute.

Valuation

Maintain HOLD call on the equity after cutting fair-value by 10.6% to RM0.71 from RM0.85 mainly to reflect the downward revision in forecasts.

Switched valuation methodology from DCF to one-year forward P/E multiple. The new TP is derived based on FY14 P/E of 8.5x, average P/E of US HDD brand manufacturers (see Figure #6).

Source: Hong Leong Investment Bank Research - 21 Nov 2013