Period

1Q16/3M16

Actual vs. Expectations

Below expectations. NOTION recorded 1Q16 core net losses of RM3.4m vs. our FY16E NP of RM10.5m.

Note that the 1Q16 core NP has been adjusted to exclude: (i) gains for mark-to-market position on its USD foreign currency hedging contracts of RM8.1m, (ii) inventories write-off amounting to RM1.6m, and (iii) gains on disposal of assets amounting to RM0.04m.

The negative deviation was due to greater losses from the settlement of currency hedging contracts as well as higher overhead costs. If not for the contracts settlement of RM5.3m, the company would have registered a core net profit of RM1.9m in 1Q16. -

Dividends

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

Highlights

YoY, 1Q16 revenue improved by 5% driven by better HDD and Auto/Industrial sales. On a closer look, Auto/Industrial segment experienced the steepest revenue growth of 20% due to a low base coupled with better orders from its automotive customers for braking systems components. While sales for HDD parts remain stable, Camera segment saw declining orders due to the lower demand for SLR cam barrel. Meanwhile at the group’s EBIT level, it was halved to RM4.4m (-56%) with margin corroded to 7.3% (from 17.5%) due to higher overhead cost and moving costs incurred for the shifting of a factory.

QoQ, 1Q16 revenue came in seasonally stronger (+12%) driven by better sales in all segments. However, core net losses widened sequentially to RM3.4m with higher losses seen in the settlement of currency hedging contracts (1Q16: -RM5.3m vs 4Q15: -RM3.4m).

Outlook

While the sluggish PC shipments and weak consumer electronic business is capping the overall HDD industry, we believe the group’s Antidisc product is well positioned for the long-term stemming from the growing enterprise storage demand. Meanwhile, the demand for its SLR cam barrel should remain sluggish in view of the muted consumer spending seen in the Interchangeable Lens Type market. On the Auto/Industrial side, sales should remain resilient as we understand that there will be new orders secured from a new customer by mid-2016.

On the currency side, the group is not gaining from the strong USD trend due to unfavourable currency hedging position, which will only expire in mid-end 2016. Hence, we believe any light at the end of the tunnel could only be seen in the latter part of 2016.

Change to Forecasts

Post results, we forecast the group to record core net losses of RM2.4m for FY16E after imputing greater losses of its hedging contracts settlement (only for FY16E) and higher operating costs. Concurrently, our FY17E NP is also reduced by 7%.

Rating

Maintain MARKET PERFORM. Although its valuation has already bottomed out (trading close to -1SD below its average 3-year mean forward PBV of 0.35x), we see no immediate re-rating catalyst to warrant an upgrade.

Valuation

Our TP has been reduced to RM0.41 (from RM0.43) which is based on a 0.4x FY16E PBV valuation.

Risks to Our Call

Upside risks – (i) Higher-than-expected SLR camera demand, and (ii) Lower-than-expected overhead costs.

Source: Kenanga Research - 19 Feb 2016