Period  2Q14/1H14

Actual vs. Expectations Below expectations. Notion VTec recorded 2Q14 normalised net loss of RM7.4m, widening the YTD losses to RM17.4m which is a significant departure from our FY14 earnings estimate and the consensus forecast of RM20.5m and RM21.3m, respectively. The negative deviations were due to the lower-than-expected sales in SLR camera barrel coupled with the lower operational efficiency.

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

Key Result Highlights YoY, 1H14 revenue declined by 8% as the sales recovery in HDD (+11%) and Auto (+25%) segments were negated by the lacklustre demand in SLR camera barrel (-39%). Compounded by the lower manufacturing yield as a result of lower operational efficiency, the group registered net losses of RM17.4m compared to adjusted NP of RM4.6m in 1H13.

 QoQ, the 2Q14 revenue decreased by 7% as the group consolidated its customers order mainly in the SLR camera segment (-49%). Coupled with the lower operational efficiency, the group registered a wider LBIT of RM7.9m compared to LBIT of RM3.8m in 1Q14.

Outlook  While the outlook of HDD segment and the Auto/Industrial segment remains resilient, we are of the view that the lacklustre demand for SLR cam barrel (due to the muted consumer spending globally as well as the shift of consumer preference to S&T) could drag revenue growth going forward.

Change to Forecasts Post-results, we have slashed our FY14E and FY15E earnings estimates by 28% and 18% to account mainly for lower sales assumption in SLR camera segment and lower EBIT margin of 13.8% (-1.5ppts) and 15.1% (-1.1ppts) due to lower operational efficiency.

Rating Maintain UNDERPERFORM

Valuation  Our TP has been increased marginally to RM0.58 (from RM0.55) as we roll forward our valuation basis year from FY14 to FY15. This is based on an unchanged targeted PER of 7.2x (close to the -2.0SD below the 3-year forward PER).

Risks to our call Favourable forex fluctuations.

 Higher-than-expected PC and SLR camera demand.

Source: Kenanga