We attended Notion's analyst briefing last Friday and went away feeling more cautious on the company's prospect as there is a risk that the group's earnings may be affected by a potential slowdown in the global economy. Management guided that its outlook for 4Q12 will be just moderate as compared to 3Q12 with revenue maintained at around just the RM90m level. Given the more muted guidance and the global slowdown risk, we have cut our revenue forecasts by 5% and 10%, to RM308m and RM367m in FY12 and FY13, respectively (vs. RM325m and RM406m, respectively, previously). In tandem with our lower expected turnovers, we have lowered our NP forecasts to RM43m and RM60m in FY12 and FY13 (from RM45m and RM64m, respectively, previously). Accordingly, our TP has also been adjusted lower to RM1.50 (from RM1.85 previously) based on unchanged targeted FY13 PER of 7.5x (3-year PER Band average). Dividend-wise, Notion has set a minimum 20% dividend payout ratio policy. Based on our new earnings estimates, the group is expected to distribute 2.9 sen and 4.0 sen dividend, which translate to a dividend yield of 2.4% and 3.3% for FY12 and FY13, respectively. Despite the downgrade, our lower TP still offers an attractive total return of 27.3% (capital gain of 24.0% and dividend yield of 3.3%) for the stock from the current share price and hence, our OUTPERFORM rating is maintained.
Summary of 3Q12 results. On a QoQ basis, the group's revenue and NP increased 13.4% and 27.7% to RM95.8m and RM19.8m respectively (from RM84.5m and RM15.5m previously) due to higher shipments of camera orders and a net write back of RM3.3m from overprovision of losses previously from the Thailand flood. YoY, the revenue surged 57.3% from RM60.9m to RM95.8m while NP jumped 96.0% from RM10.1m to RM19.8m due to higher ASPs and unit shipments of HDD after the Thailand flood. Margin-wise, the group was still able to maintain its EBITDA margin at 35.5% in 3Q12 compared to 37.3% in 3Q11.
Outlook for 4Q12.Management guided for a mild 4Q12 result where the top line is expected to be flat at RM95.0m (3Q12: RM95.8m) while the bottom line is expected to record around a lower RM10m-RM15m (3Q12: RM 19.8m). For the full year, Notion is expected to grow 30% YoY in revenue with a slightly lower NP of RM43m (compared to RM47m in FY11) due to lower earnings in the earlier first two quarters of the current financial year (effects from the Thai flood). In addition, going forward, the group is getting more concerned about the global economic uncertainties due to the Eurozone crisis, the slowdown in the emerging markets (China and India) and the volatility of USD.
Lower ASP but unit shipment forecast remains unchanged. Although the management views that the ASPs of HDDs would be sustainable, we reckon that they will face downward pressure from a lower consumer spending as consumers start to be more cautious on the slowdown in the global economies. We have lowered our ASP assumption by 7% to align with its key clients - Western Digital and Seagate, which recorded lower ASP of 4%-7% during their latest quarter. Price aside, we, however, still expect the unit shipments of HDD to increase by around 10% p.a., in line with the industry expectation. In the same vein, we understand that management is still expecting its Camera segment to grow by around 15% p.a. in the next 1-2 years.
Source: Kenanga