News   In a Bursa announcement, Notion VTec (NVB) has announced that it is subscribing for a 19.9% stake (equiv. to 975m shares) in Australia-listed pure silver producer Alcyone Resources Ltd, at an issue price of AUD0.005 per share for a total cash consideration of AUD4.875m (c.RM14.7m).

Upon completion of the subscription, Alcyone will issue free 487.5m AYNOA options to NVB with an exercise price of AUD0.01 expiring on 31 July 2015. (1 free option for every 2 shares subscribed)

Should NVB convert the options to Alcyone shares, NVB's stake will rise to an associate level of 27.1% (with an assumption of no other conversions by other AYNO/AYNOA Options holders) which will enables NVB to account for its earnings at the associate level.

Comments   We view this shares subscription to be NEUTRAL; the reasons below:

In our view, although the subscription price of AUD0.005 per share which implied a c.1.5x PBV (industry PBV at 1x) or 43% premium of the current market price appear to be stretched, the stake in Alcyone would give NVB access to cheaper and consistent supply of silver (as high as 99.9% purity) for precision component's manufacturing. Judging from the groups' intention to diversify its earnings reliance from the HDD segment, we do not discount this investment is also for the future foray into the components making for handphone/tablets, PCs/laptops, and automobiles, which require silver metals.

We also view the shares' subscription as a win-win approach for both company as the participation in Alcyone's untaken rights issue by NVB will provide a sufficient fund for Alcyone's mine upgrading works, which will ensure its profitability by January 2014 (assuming no sharp drop in silver price); meanwhile in return Notion can equity account its profit should it become an associate company of NVB (>20%, below 50%). Note that the Alcyone’s FYE13 June LAT was AUD10.3m.

Balance-sheet impact is minimal as we expect NVB's gearing to increase to 0.23x (from 0.18x currently) Outlook  The HDD segment of the group (estimated to contribute c.36% to the group's revenue in FY13) could continue to drag total revenue growth amidst dwindling PC demand. Nevertheless, we believe that the group’s move to diversify into components for the oil & gas, aerospace, robotics, and consumer electronics (predominantly in tablets) should cushion the impact thus capping the downside from declining HDD demand.

Forecast   Our FY13-FY14 earnings estimates have been marginally reduced by 1-2% following the lower interest income (with lower cash level) after accounting for the cash usage.

Rating   Maintain OUTPERFORM

Valuation  Our TP of RM0.98 has been marginally reduced to RM0.96 post our earnings revision. This is based on a targeted PER of 7.5x (-0.5SD below the 4-year forward PER).

Risks to Our Call   Lower global demand for silver.

Adverse forex and silver prices fluctuations.

Sluggish PC and electronics demand. 

Source: Kenanga