1H16 core LATAMI of RM8.4m missed expectation compared to our full-year core LATAMI estimate of RM2.4m. Main culprits were the weaker-than-expected sales from its HDD and Camera segments, further aggravated by lower operational efficiency. No dividend as expected. Post results, we are forecasting the group to record core NL of RM12.2m after accounting for weaker sales in HDD and Camera segments as well as higher operating costs; while our FY17E NP is also cut by 35%. Although its valuation has already bottomed out (trading close to -1SD below its average 5- year mean forward PBV of 0.34x), we see no immediate re-rating catalyst to warrant the upgrade. Maintain MARKET PERFORM with an unchanged TP of RM0.41, based on a targeted 0.4x FY17E BVPS (with valuation rollover from FY16).

Below expectation. NOTION recorded 2Q16 core net losses (NL) of RM5.0m, widening 1H16 core LATAMI to RM8.4m vs. our FY16E core NL of RM2.4m. Note that the 1H16 core NL has been adjusted by excluding: (i) fair value gains for mark-to-market position on its USD foreign currency hedging contracts of RM17.4m, (ii) inventories write-off amounting to RM2.8m, and (iii) gains on disposal of assets amounting to RM0.04m. The negative deviation was due to weaker sales from its HDD and Camera segments, further aggravated by lower operational efficiency. At EBIT level, the group marginally broke even at RM2.7m (vs 1H15 EBIT of RM17.3m).

No dividend was declared during the quarter, as expected.

YoY, 1H16 revenue decreased by 4% with growth from stronger Auto/Industrial sales (+16%) negated by both weaker HDD (-8%) and Camera (-15%) segments. Looking at the bright spot, Auto/Industrial segment registered decent revenue growth of 16% due to a low base coupled with higher order from its automotive customers for braking systems components. While its revenue share also expanded by 5%, this was not enough to offset the weakness in both HDD and Camera segments, which continued to see soft demand from end markets. Meanwhile at the group’s bottomline, core LATAMI widened to RM8.4m with EBIT margin shrank to 2.3% (from 1Q16’s 7.3%) on lower operational efficiency.

QoQ, 2Q16 revenue decreased by 7% dragged mainly by HDD (-7%) and Camera (-30%) segments. With ongoing high overhead costs coupled with continual losses from the settlement of hedging contracts, core net losses widened sequentially to RM5.0m (1Q16: -RM3.4m).

Headwinds persist in the group’s key revenue contributors. Sales from the Auto/Industrial segment should remain resilient on the back of new orders from new customer. However, sluggish PC shipments as well as muted consumer spending seen in the Interchangeable Lens Type market could continue to drag HDD and Camera segments. While we believe that the operational weakness could only be out of the tunnel towards the end of 2016 (with excess inventory cleared as soon as year-end), the group’s prudent cash management which has yielded a net cash of RM10.6m to date (vs RM5.3m a year ago) will help the group to sail through the choppy environment.

Post results, we forecasted the group’s FY16E bottomline to record core net losses at RM12.2m after accounting for weaker sales in HDD and Camera segments as well as higher operating costs. Concurrently, our FY17E NP is also cut by 35% to RM10.8m.

Maintain MARKET PERFORM with unchanged TP of RM0.41, on a targeted 0.4x FY17E BVPS (with valuation rollover from FY16). Although its valuation has already bottomed out (trading close to -1SD below its average 5-year mean forward PBV of 0.34x), we see no immediate re-rating catalyst to warrant the upgrade. 

Source: Kenanga Research - 19 May 2016