We revise upwards our FY12/FY13 core earnings forecasts by 16.8%/34.9% as we see an earnings lift from its HDD and camera segments, buoyed by pent-up demand from Minebea and Nikon. This leads to a higher FV of RM1.50, based on 6.4x CY13 PER. We Maintain our TRADING BUY recommendation as we continue to like the company for its diversified product base.
Bullish guidance. On the back of a good set of financial results spurred by the rapid recovery of upstream players from the Thai floods, Notion remains positive on the outlook for its HDD and camera business. Overall, management is guiding for a top-line growth of 41% for FY12 and by another 33% in FY13.
2.5' HDD baseplates to boost top-line. Although we gather that the company faced some production capacity constraints in 2QFY12 as the limited supply of manpower capped the growth of its HDD segment, management resolved the issue by hiring 1k more workers at a cost of RM18m/year. As a result, Notion was able to ramp up its 2.5' HDD baseplate production from less than 2m pieces/mth to 4m pieces/mth to cater to demand from Minebea. Assuming the cost of a typical HDD baseplate of USD1.30/piece, Notion is poised to generate an additional USD31.2m/year (~RM93m/year). This suggests that the segment will see high profits going forward.
Growing appetite for CIL products. In the camera segment, Nikon expects the market for cameras with interchangeable lens (CIL) to experience rapid growth, buoyed by the accelerated expansion of the non-reflex camera market. The company is guiding for CIL shipments to climb 48% while that in the IL segment is expected to expand by 40% in FY13 (Nikon's financial year-end is in March). These developments bode well for Notion as orders for its cam barrels pick up.
Minimal contribution from China. Meanwhile, on the company's proposed facility in Dongguan in China, management says it is cautious with investment spending as the competition in that country is intense, and as such, prudence is warranted. Hence, we expect the financial contribution from Notion's China operations to be minimal.
Keep TRADING BUY, revised FV RM1.50. We are revising upwards our FY12/FY13 core earnings forecasts by 16.8%/34.9% on the back of: (i) increasing volume production for its 2.5' HDD baseplates, and (ii) pent-up demand for CIL products. However, we are trimming our PER multiple from 8x to 6.4x (a 20% discount to its 7-year average forward PER of 8x) in view of the weaker market sentiment as well as roll over our valuation to CY13. As a result, we derive a higher FV of RM1.50. Maintain TRADING BUY.