Period

4Q15/FY15

Actual vs. Expectations

Below expectations. Notion VTec recorded 4Q15 core net losses of RM2.7m, sending FY15 core net losses to RM0.6m vs our full-year net profit (NP) estimate of RM5.5m.

Note that the FY15 core NP has been adjusted by excluding: (i) one-off gains of RM8.8m from the disposal of factory building and land, (ii) losses for mark-to-market position on its USD foreign currency hedging contracts of RM18.0m, (iii) PPE and inventories write-off amounting to RM9.6m, and (iv) allowances for impairment losses on PPE amounting to RM5.9m.

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, FY15 revenue improved by 23% with better sales seen across all segments. On a closer look, HDD experienced the steepest revenue growth of 31% due to low base as well as stronger orders from HDD customers on the back of increasing demand of cloud computing. Meanwhile, both Auto and Camera segments also seen stellar growth of 23% and 11%, respectively, from low base; with the latter recovered with steadier order volumes supported by its strategic partner.

While EBIT improved by leaps and bounds to RM37.7m (vs LBIT of RM29.4m) mainly helped by the higher revenue across all segments coupled with the one-off gain 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 RM0.6m as operating profit wiped out, mainly by the derivatives losses on unfavourable hedging position.

QoQ, 3Q15 revenue came in weaker (-12%) dragged by lower shipment of Camera (-30%) and Auto/Industrial (-7%) segments. However, at the bottomline, core net losses of RM2.7m narrowed sequentially with lower losses seen in the settlement of currency hedging contracts (4Q15: -RM3.4m vs 3Q15: -RM8.0m).

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 poised well for the long-term due to demand 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.

Meanwhile on the currency side; while a stronger appreciation of the USD will typically benefit NOTION given its exportoriented earnings profile in USD, the group is not gaining from the trend due to unfavourable currency hedging position, which will only expire in mid-2016. Hence, we believe any light at the end of the tunnel could only be seen in the latter part of FY16.

Change to Forecasts

Post-results, we have reduced our FY16E NP by 30% to account for the losses on settlement from currency hedging contracts. We also introduced our FY17E numbers.

Rating

Maintain MARKET PERFORM. Although its valuation has already bottomed out (trading close to -1SD below its average 3-year mean forward PBV of 0.36x), we see no immediate re-rating catalyst to warrant an upgrade.

Valuation

Our TP of RM0.43 which is based on a 0.4x PBV valuation remained unchanged.

Risks to Our Call

Upside risk : Higher-than-expected SLR camera demand.

Source: Kenanga Research - 20 Nov 2015