We came away from Notion’s 2QFY13 post-result briefing feeling NEUTRAL. We reckon that the growth might not be as impressive as last year given the high base effect in FY12 as well as sluggish 1H performance to date. Meanwhile, the impact from the minimum wage ruling could suppress the margin. However, these negative factors shall be cushioned by a better growth prospect in the 2HFY13. Post 2QFY13 results and briefing, our FY13E-FY14E net profit forecasts have been lowered to RM14.1m and RM35.3m (from RM30.7m and RM 44.2m in FY13E and FY14E respectively previously). We have also rolled over our 12-month TP valuation from 5.3x FY13 EPS to 5.9x FY14 EPS (being the -1SD below the 3-year average forward PER) as the group is already entering into the 3QFY13 period. With a higher TP of RM0.77 (from RM0.60 previously), we are upgrading our rating on the stock to a MARKET PERFORM. 

Further details on 2QFY13 results. Notion netted in a slim core net profit (NP) of RM2.4m, bringing its 6MFY13 core NP to marginally to a break-even level of RM4.6m. The main culprits were the lacklustre demand for the group’s products amid the frail economic condition coupled with the impact from the minimum wage policy implementation. In terms of the segmental revenue breakdown, the HDD segment gained a larger share of 39% in 2QFY12 (+4ppts QoQ, cushioned by the demand in digital data) at the expense of a shrinking revenue share in the camera segment (-5ppts QoQ to 41%, dragged down by pallid  sales in interchangeable lenses mainly from the Europe side). Meanwhile, the revenue share of the industrial/automotive segment remained relatively unchanged at 19% (-1ppts QoQ). 

The group’s orders are on the mend. For the month of April, management noted that the overall orders had picked up by 30% on the back of the economic recovery and believed that the rise would be sustainable until the end of the year, possibly c.30%-40% higher than 1HFY13. This supports our view (that the recovery will be seen in the 2HCY13), which was also espoused in our Technology sector report dated 07 of May 2013. However, while the group’s revenue is on the mend, we reckon that the growth may not be as good as last year given the high base effect as well as a sluggish 1H performance to date. At the bottom line, we believe that the implementation of the minimum wage ruling could suppress the margin of the group, thus translating into a slimmer profit for the year. 

Other updates. In terms of capex guidance, the group is looking at c.RM28m for FY13 of which c.RM14m is to replace the equipments  destroyed during the fire incident. Consequently, we have also lowered our capex assumption of RM45m in FY13 to c.RM30m. Meanwhile, as for the latest update on its insurance claims post the fire incident, management is confident that the group will be able to claim the full submitted amount (of c.RM50m) in a couple of weeks henceforth  and is hoping to have the amount adjusted in 3QFY13 later. Notably, the group is also undergoing a transition period currently with its focus mainly on new components in the industry of oil & gas, aerospace, robotics, and consumer electronics predominantly in tablets. Management said that the move is to diversify its heavy reliance on the HDD segment and was still at preliminary stage. 

Our take post-results briefing. Post-briefing, we have lowered our FY13E-FY14E net profit forecasts to RM14.1m and RM35.3m to account for (i) a lower revenue assumption (-3% to -17% in FY13E-FY14E), (ii) a lower GP assumption (-6ppts to c.18% in FY13) as well as (iii) a higher interest rate (from 5.5% to c.7% in FY13EFY14E). We have rolled over our 12-month TP valuation from 5.3x FY13 EPS to 6.0x FY14 EPS (being the -1SD below the 3-year average forward PER) as the group is already entering into the 3QFY13 period. As a result, our Notion target price has been lifted to RM0.77 (from RM0.60 previously) despite a cut in our net profit forecasts. We are upgrading our rating on the stock to a MARKET PERFORM as the TP now offers a potential capital upside of 5%.

Source: Kenanaga