Period  4Q13/FY13

Actual vs. Expectations  Notion Vtec reported 4Q13 net profit (NP) of RM2.0m (-89% YoY, -95% QoQ), taking its FY13 NP to RM21.8m (-56%).

 Below expectations. Excluding the exceptional items of: (i) gain of RM8.2m arising from additional gains from a fire insurance claim, (ii) impairment losses on inventory of RM2m, the FY13 core NP of RM15.6m (-68%) accounted for only 86% and 89% of our and the consensus full year estimates, respectively. The main negative deviation was the unrealised derivative losses of RM3.8m.

Dividends  As expected, an interim tax-exempt dividend of 1.0 sen (YTD: 1.0 sen) was declared under the quarter reviewed, translating into a net dividend yield of 1.3%.

Key Result Highlights YoY, the FY13 revenue declined by 27%, dragged down by the weaker HDD segment (-30%) and lacklustre demand in SLR camera barrel (-31%) in the 1H coupled with the high base in FY12 (mainly boosted by the strong order recovery post the Thai flood disaster in 2Q-4Q12). Consequently, the group registered a lower core PAT of RM15.6m (-68.3% YoY) aggravated by higher cost of sales (80.8% of total revenue in FY13 compared to 76.3% in FY12) as a result of lower operational efficiency.

 QoQ, the 4Q13 revenue came in flat with -0.2% growth as the Auto/Industrial segment’s out-performance (+7%, due to the entrance of new customer – TRW) was erased by lower demand seen in the SLR camera segment (-4%) amidst slower demand in China and Europe. Meanwhile, revenue growth of PC segment remained relatively flat with an unchanged product mix contribution of 34%. At the bottom line, the group registered a lower PAT of RM4.0m (-42.5%) mainly due to the unrealised derivative losses of RM7.5m.

Outlook  The HDD segment of the group (estimated to contribute c.33% to the group revenue in FY14) could continue to put a drag to the group’s revenue growth amidst dwindling PC and notebook demand. Meanwhile on the camera segment, management now sounded more cautious in light of the muted consumer spending globally as well as the shift of consumer preference to smartphones and tablets.

Change to Forecasts Post results, we have slashed our FY14E earnings estimates by 14% to account mainly for lower sales assumption in camera, HDD segment and lower EBIT margin of 18.4% (from 18.7%).

Rating Downgrade to MARKET PERFORM

Valuation  Inline with the earnings cut, our TP has been reduced to RM0.81 (from RM0.96), which is based on an unchanged targeted PER of 7.4x (represents -0.5SD below the 4-year forward PER)

Risks to our Call  Favourable forex fluctuations.

 Higher than expected PC and SLR camera demand.

Source: Kenanga