Period  1Q15/3M15

Actual vs. Expectations  Within house but above consensus’ expectation. Notion Vtec recorded a 1Q15 core net profit (NP) of RM4.3m (+180% QoQ, +127% YoY), which came in at 26% and 36% of our and the consensus full-year estimates, respectively.

 Note that the 4Q14 core NP has been adjusted by excluding: (i) unrealised foreign exchange loss provision of RM12.6m due to sharp appreciation of USD, (ii) deferred tax income amounting to RM4.6m, and (iii) inventories write-off of RM1.5m. –

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

Key Result Highlights  YoY, 1Q15 revenue improved by 22% with better sales seen across all segments. On a closer look, HDD experienced the steepest revenue growth at 43% due to a low base as well as better orders from HDD customers on the back of increasing demand of cloud computing. While Auto segment seen a healthy growth at 11%, demand in Camera segment remained sluggish, at a mere 4% growth even from a low base amidst the muted consumer spending in SLR camera. With the overall sales coming in higher at RM58.3m (+22% from RM47.7m) coupled with higher operational efficiency, the group registered a core NP of RM4.3m compared to core NL of RM10.0m in 1Q14.

 QoQ, the 1Q15 revenue improved by 5% on increased orders from HDD (+23%) and Camera (+13.8%) segments to offset weaker sales in Auto/Industrial segment (-15%). With lower cost of sales coupled with higher operating income, core NP came in higher at RM4.3m compared to core NL of RM3.4m in 4Q14.

Outlook  While the outlook of HDD 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 is experiencing some glass tempering issue.

 On the currency side, while a stronger appreciation of the USD will typically benefits NOTION’s profitability given its export-oriented earnings profile in USD, management mentioned that the group is not gaining from the trend due to unfavourable currency hedging position at RM3.20/USD which will expire in mid-2015.

Change to Forecasts  We maintain our FY15E and FY16E earnings for now.

Rating Maintain MARKET PERFORM Valuation  Our TP of RM0.46 remained unchanged for now. 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  Higher-than-expected SLR camera demand. 

Source: Kenanga