Period

3Q15/9M15

Actual vs. Expectations

Below expectations. Notion Vtec recorded narrower 3Q15 core net losses of RM1.6m (+65% QoQ, +59% YoY), sending 9M15 core net losses to RM1.4m (9M14: -RM18.0m) vs our full-year estimate of RM11.1m.

Note that the 3Q15 core NP has been adjusted to exclude: (i) one-off gains of RM8.9m from the disposal of factory building and land, (ii) gains from mark-tomarket position on its USD foreign currency hedging contracts of RM7.7m, (iii) deferred tax expense of RM4.7m, and (iv) inventories write-off amounting to RM3.1m.

The negative deviation was due to greater losses from the settlement of currency hedging contracts. -

Dividends

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

Highlights

YoY, revenue in 9M15 improved by 28% with better sales across all segments. On a closer look, HDD experienced the steepest revenue growth of 38% due to low base as well as better orders from HDD customers on the back of increasing demand for cloud computing. Meanwhile, both Auto and Camera segments also seen stellar growths of 26% and 15%, respectively, from low bases, with the latter recovering with steadier order volumes supported by its strategic partner.

While EBIT improved by leaps and bounds to RM33.8m (vs LBIT of RM12.8m) mainly helped by the higher revenue across all segments coupled with the one-off gains of RM8.9m from factory building and land (housing Plant 2’s operation which consists of Auto and HDD operations), core bottomline, however, recorded marginal losses of RM1.4m with operating profits wiped off by the derivatives losses on unfavourable hedging position.

QoQ, 3Q15 revenue came in marginally weaker (-3%) as the robust sales growth in Camera (+42%) was negated by lower shipment of HDD (-23%) and Auto/Industrial (-5%) segments. However, at the bottomline, core net losses of RM1.6m narrowed sequentially with lower losses seen in the settlement of currency hedging contracts.

Outlook

While high inventories in HDD globally (amid the contraction of PC shipments and weak consumer electronic business) have caused a temporary blip in overall shipments, we believe the group’s key product- Antidisc is positioned well for the long-term stemming from the growing enterprise storage. Meanwhile, we believe the demand for the group’s SLR cam barrel will remain sluggish in view of the muted consumer spending seen in the Interchangeable Lens Type market.

The group has terminated its online smartphone-selling business in view of the highly competitive environment; with small investment loss of RM500k being booked. Note that we did not impute any earnings forecasts for this segment.

Meanwhile, on the currency side, with the expiry of bulk of the unfavourable forward contracts, the group’s earnings should see a normalised trend going forward with upside bias given the strong USD and EUR against MYR.

Change to Forecasts

Post results, we have reduced our FY15E NP by 50% to account for the greater losses from the settlement of currency hedging contracts in 3Q15. Meanwhile, our FY16E NP remained unchanged.

Rating

Maintain MARKET PERFORM. Although its 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 for the upgrade.

Valuation

Our TP of RM0.43 which is based on a PBV valuation (implies FY16 PBV of 0.35x and PER of 7.7x) remained unchanged due to the lack of rerating catalyst.

Risks to Our Call

Higher-than-expected SLR camera demand.

Source: Kenanga Research - 21 Aug 2015