Period

2Q15/6M15

Actual vs. Expectations

Below expectations. Notion Vtec recorded 2Q15 core net losses of RM4.5m (-193% QoQ, +54% YoY), bringing 1H15 core NP to RM0.4m (+102%) vs our and the consensus full-year estimates of RM16.6m and RM12.0m, respectively.

Note that the 2Q15 core NP has been adjusted by excluding: (i) provision for mark-to-market position on its USD foreign currency hedging contracts of RM1.3m, (ii) deferred tax income amounting to RM3.4m, and (iii) inventories write-off of RM2.2m.

The negative deviations were: (i) higher-than-expected cost of sales, and (ii) greater losses from the settlement of currency hedging contracts. -

Dividends

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

Highlights

YoY, 1H15 revenue improved by 33% with better sales seen across all segments. On a closer look, HDD experienced the steepest revenue growth of 45% due to a low base as well as better orders from HDD customers on the back of increasing demand of cloud computing. Meanwhile, both Auto and Camera segments also saw stellar growths of 28% and 19%, respectively, from low bases; with the latter enjoying steadier order volumes supported by its strategic partner.

YoY, while EBIT improved by leaps and bounds to RM17.3m (vs LBIT of RM11.7m) helped by the higher revenue across all segments coupled with higher operational efficiency, core NP, however, merely breakeven at RM0.4m with gains at operating level wiped off by the derivatives losses on unfavourable hedging position.

QoQ, 2Q15 revenue improved by 10% driven by increased orders from HDD (+15%) and Auto (+21%) segments. However, the bottomline suffered core net losses of RM4.5m with main culprits being (i) higherthan- expected cost of sales as well as (ii) the greater losses from the settlement of currency hedging contracts.

Outlook

While the outlook of its HDD segment remains intact underpinned by key products - Antidisc, which is the crucial component for high bulk storage used in the Enterprise segment, we are of the view that the ongoing slow demand for the group’s SLR cam barrel (due to the muted consumer spending globally) could continue to drag the group’s earnings growth.

On its recently-launched online smartphone-selling business, we see stiff competition in the space given high market saturation already crowded with renowned brands. Hence, we have yet to impute any earnings forecasts for this segment as we believe the earnings accretion is unlikely to be significant.

Meanwhile on the currency side; while a stronger appreciation of the USD will typically benefit 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. Hence, we believe any light at the end of the tunnel could only be seen in FY2016.

Change to Forecasts

Post-results, we have reduced our FY15E-FY16E NPs by 15-34% to account for higher cost of sales and greater losses from the settlement of currency hedging contracts.

Rating

Maintain MARKET PERFORM. Although its share price’s valuation has already bottomed out (trading close to -1SD below its average 3-year mean forward PBV of 0.37x), we see no immediate re-rating catalyst to warrant an upgrade.

Valuation

Post-results, we rollover our valuation base year from FY15E to FY16E. With a targeted 0.37x ascribed on FY16E BVPS (at -1SD below its average 3-year mean forward PBV), our new TP is now RM0.43 (from RM0.46 previously). Our new TP also implies a FY16E PER of 7.7x.

Risks to Our Call

Higher-than-expected SLR camera demand.

Source: Kenanga Research - 15 May 2015