Actual vs. Expectations Below expectations. Notion Vtec recorded a 4Q14 core net loss (NL) of RM3.4m (-371% QoQ, -249% YoY), widening the core NL to RM19.5m (-241%). The results came in lower than our forecast and the consensus estimates of -RM4.0m and -RM4.6m for FY14, respectively.

 Note that the 4Q14 core NL has been adjusted by excluding:

(i) the impairment of the investment in Alcyone Resources Ltd of RM9.8m (previously invested c.RM14.7m) and (ii) interim payment of RM3.7m from the business interruption policy claim.

 The negative deviation was due to the-lower-than expected operational efficiency dragged by ongoing lacklustre demand seen in camera segment.

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

Key Result Highlights YoY, FY14 revenue declined by 10% as the stronger sales in HDD (+7%, with its products skewed towards the Enterprise segment which is currently benefitting from the increasing demand of cloud computing) and Auto (+38%) segments were negated by the lacklustre demand in SLR camera barrel (-45%, normalisation from high base effect where the booming demand in SLR previously was due to the migration from Analogue to Digital as well as consumer patterns shifting towards the Smartphone/Tablets (S/T) segment). Compounded by the lower manufacturing yield as a result of lower operational efficiency, the group registered core NL of RM19.5m compared to core NP of RM13.9m in 9M13.

 QoQ, the 4Q14 revenue increased by 6% with increased orders from HDD (+23%) to offset weaker sales in SLR camera segment (-6.5%) and Auto segment (-1.8%). While the group's sales came in stronger than the previous quarter, core PBT came in at losses of RM9.8m with higher cost of sales recorded, further exacerbated by the derivative loss of RM3.4m.

 The group has recorded an impairment loss of RM9.8m for its associate (19.9% stake)- Alcyone Resources as the mining company has been put under receivership by one of its convertible note holder. Note that the group had previously invested RM14.7m back then in Oct 2013.

Outlook  While the outlook of HDD segment and the Auto/Industrial segment remains resilient, we are of the view that the lacklustre demand for the group’s SLR cam barrel (due to the muted consumer spending globally) could drag the group’s earnings growth.

 Meanwhile on its new smartphone business, the group noted that the business is still at R&D phase as it experienced some glass tempering issue. The production phase is expected to be delayed for a few more months from early FY15. We have yet to impute any earnings forecasts due to scarcity of detail.

Change to Forecasts Post-results, we reduced our FY15E earnings by 23% to RM16.6m with a lower GP margin assumption of 15% (from 19%) to mainly account for lower manufacturing yield. We have also introduced our FY16E earnings of RM17.6m based on a flat growth assumption to its key drivers.

 Note that we have also excluded the earnings contribution from its associate- Alcyone Resources in FY15. We were previously expecting its associate to record –RM2m.

Rating Maintain UNDERPERFORM

Valuation  We reduce our TP to RM0.46 (from RM0.58) as we switched our valuation method from PER valuation to PBV valuation given its weaker earnings visibility as well as its waning earnings performance. This is based on a targeted 0.4x FY15 PBV (close to -1SD below its average 3-year mean forward PBV).

Risks to Our Call  Favourable forex fluctuations.

 Higher-than-expected SLR camera and PC demand.

Source: Kenanga