Period  3Q14/9M14

Actual vs. Expectations  Below expectations. Notion Vtec recorded a mere 3Q14 core profit of RM1.3m (+117% QoQ; -82% YoY), marginally narrowing the YTD adjusted losses to RM16.1m (-239%).

 The results came in significantly lower than our forecast and the consensus estimates of RM14.7m and RM14.2m for FY14, respectively. The negative deviation was due to the weaker operational efficiency as well as greater losses at its associate level.

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

Key Result Highlights YoY, 9M14 revenue declined by 11% as the sales recovery in HDD (+5%, with its products skewed towards the Enterprise segment which is currently benefitting from the increasing demand of cloud computing) and Auto (+36%) segments were negated by the lacklustre demand in SLR camera barrel (-43%, with consumer patterns shifting towards the Smartphone/Tablets (S/T) segment). Compounded by the lower manufacturing yield coupled with a lower operational efficiency, the group registered adjusted losses of RM16.1m compared to core NP of RM11.6m in 9M13.

 QoQ, revenue rebounded by 18% from a low base as the lower sales in HDD (-10%) was offset by increased orders from SLR camera segment (+48%) and Auto segment (+43%). While the group 's revenue is still weak with EBIT level still registering losses of RM1.1m, derivative gain of RM5.8m had reversed the losses with NP recorded at RM1.3m.

Outlook  While the outlook of HDD segment and the Auto/Industrial segment remains resilient, we believe the lacklustre demand for the group’s SLR cam barrel (due to the muted consumer spending globally as well as the shift of consumer preference to S&T) could drag the group’s earnings growth.

 Additionally, the group had in the announcement noted that it will foray in the S/T segment by supplying up to 500k machined glass parts for Smartphones with operations based in its Ayutthaya, Thailand plant. The operation is expected to start only by early FY15 with minimal capex to be incurred. We have yet to impute any earnings forecasts due to scarcity of details.

Change to Forecasts Post-results, we have slashed our FY14E earnings estimates of RM14.7m to losses of -RM4.0m with lower gross profit margin assumption of 5.3% (from 19% previously) on lower manufacturing yield while maintaining our FY15E NP estimates with an unchanged GP margin assumption of 19%.

Rating Maintain UNDERPERFORM

Valuation  We maintain our TP of RM0.58 based on an unchanged targeted FY15 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 SLR camera and PC demand.

Source: Kenanga