Period a 1Q14

Actual vs. Expectations Below expectations. Notion Vtec reported 1Q14 net losses of RM10.0m, against our and consensus FY14 earnings estimates of RM30.3m and RM29.4m, respectively. The negative deviations were due to the lower-than-expected sales in SLR camera barrel coupled with the lower operation efficiency.

Dividends  As expected, no dividend was declared under the quarter reviewed.

Key Result Highlights YoY, 1QFY14 revenue declined by 2.9% as the sales recovery in HDD (+13%) and Auto (+33%) segments were negated by the lacklustre demand in SLR camera barrel (-30%). Compounded by the lower manufacturing yield as a result of lower operational efficiency, the group registered net losses of RM10.0m compared to adjusted NP of RM2.2 in 1Q13.

 QoQ, the 1Q14 revenue decreased by 23% as the Auto/Industrial segment’s outperformance (+10% which was due to increased orders from new customer – TRW) was erased by lower demand in the SLR camera segment (-46%, as the industry attempts to shed off excess inventory). Meanwhile, sales in the HDD segment also came in weaker at -9%. At the EBIT level,

the group registered a LBIT of RM3.8m compared to EBIT of RM12.0m in 4Q13.

Outlook  The lacklustre demand for the group’s SLR cam barrel was due to the muted consumer spending globally. Coupled with the shift of consumer preference to S&T, all these could drag the group’s revenue growth going forward. The segment is expected to recover only by 2015 after the excess inventory is cleared from market.

 The group is considering adopting an asset light manufacturing model compared to the current model of owning landed assets, to unlock the value of its landed assets in order to free up cash for new less capital intensive investments.

 From what we gather from the management, the group is considering to dispose all of its c.19 acres (totalling 858k sq ft) of freehold land at Meru with a built-up of c.750k sq ft and the Ayutthaya Rojana Factory of 4 acres (totalling 170k) and built up of c.150k sq ft. Based on the freehold land market price in Meru, which ranges from RM60 to RM85psf, the freehold land at Meru could be worth RM52m-RM73m (Net book value at RM54m).

 We have yet to impute any forecast for the scheme of the asset light manufacturing model due to the scarcity of details.

Change to Forecasts

 Post results, we have slashed our FY14E and FY15E earnings estimates by 26% and 32% to account mainly for lower sales assumption in SLR camera segment and lower EBIT margin of 17.0% (from 18.4%) due to lower operation efficiency.

Rating Downgrade to UNDERPERFORM

Valuation  Our TP has been reduced to RM0.55 (from RM0.81), which is based on a lower targeted PER of 7.2x (from -0.5SD to now -1.0SD below the 3-year forward PER) as we have turned more cautious on its bleak outlook.

Risks to our call  Favourable forex fluctuations.

 Higher-than-expected PC and SLR camera demand.

Source: Kenanga